Mortgage versus Foreclosure

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Mortgage versus Foreclosure

A mortgage is a loan where any property or real estate is utilized as security. The borrower or debtor inks a deal with the lender, which in most cases are banks and receives cash and then starts repaying over a determined period until the loan is repaid in full.

On the other hand, foreclosure is the upshot of a failure or inability on the part of the borrower to pay the mortgage. More explicitly, it is a legal procedure by which the owner loses his or her rights to the mortgaged property.

If the property owner is unable to pay off the loan or sell the property through short sale, it is sold through a foreclosure auction. Mortgage loans are preferred by quintessential home buyers who do not have sufficient cash-in-hand to acquire the property. Moreover, they are also used to seek cash loan from lenders for other projects using their property as security or guarantee.

Mortgages are similar any financial product where the supply and demand changes along with the market position. This is why sometimes banks or lenders offer lower rates of interest and sometimes higher. Mortgages facilitate bigger purchase deals for buyers who are short of sufficient cash to buy a property. Banks or lenders take a risk in big loans as there is no guarantee that the debtor will be able to repay the loan in future and might face foreclosure.

Types of Mortgages:

Fixed-rate mortgages

These are the plainest type of loan where the debtor has to make equal payment for the total period of the debt. Usually, fixed rate mortgages last for 30 or 15 years.

Adjustable rate mortgages

These are alike, although the interest rate may change at some point of time. When it happens, there is a change in the monthly payment. If there is an increase in interest rates, then the payment will increase, and if there is a fall or drop in interest rates, there might be lower obligatory monthly payments.

Second mortgages

These enable the borrowers to add mortgage and get more cash loan. The second mortgage lender is “in the second position,” connoting they only receive payment if there is any money left over after the first mortgage holder receives repayment. Second mortgages are occasionally used to pay for renovations of homes and higher education.

Reverse mortgages

These offer income to senior citizens or elderly people (usually those over 62) who have adequate equity in their homes. Retired people at times make use of a reverse mortgage to increase income or to obtain a lump sum of money out of homes that they have paid off long back.

Types of Foreclosures:

Various kinds of foreclosures exist in Canada, the United States, and many European nations.

Judicial foreclosure

Foreclosure by judicial sale, is known as judicial foreclosure, entails the sale of mortgaged property under court supervision. Under this system, the lender initiates a foreclosure by filing a lawsuit against the debtor.

No judicial foreclosure

This type of foreclosure involves the sale of property by the mortgage holder without court supervision. Usually, this process is much faster and cheaper compared to foreclosure by judicial sale.

Strict foreclosure

Other types of foreclosure are considered inconsequential for the reason of their restricted availability. Under strict foreclosure, the suit is brought by the mortgagee, and if successful, a court orders the defaulted mortgagor to pay the mortgage within a stipulated period. If the mortgagor is unable to pay, the mortgage holder gets the title to the property with no compulsion to sell it. This kind of foreclosure is usually available only when the price of the property is less than the debt.

Many a time we see that reluctant mortgagees prefer foreclosure for the following reasons – to save money, to negotiate the terms of the loan, to make a fresh start after removing a big burden and considering foreclosure as a valuable lesson.

However, its key negative point is that it also leaves a black spot on the credit of the home or property owner, and might cost him/her any money that has been invested in the home or real estate.

It has also been noticed that while some home owners are under pressure to make payments due to monetary impediments, some of them declare themselves as bankrupt or sell the property to avoid foreclosure.

Posted by: guptasougata73 Posts: (44) Opinions: (371) Points: 5,170 Rank: 22

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