What is a Mortgage Agreement?
03 06 2017
From basic home ownership to the world of commercial real estate investing, one key contract both borrower and lender will undoubtedly encounter is the mortgage agreement. Having a working knowledge of the ins and outs of mortgage agreements is a crucial tool to keep in your real estate investing toolbox, so let’s dive into the basics – and help you become a master of the mortgage agreement.
What is a Mortgage Agreement?
Before we proceed any further, we should settle on a good working definition for “mortgage agreement.” Fortunately for us, it’s pretty straightforward:
Mortgage Agreement: A pledge by a borrower to a lender stating that if they cannot pay their loan, they will give up their claim to the property to that lender.
There are some common misconceptions about what is entailed in a mortgage agreement, so now would be a good time to clear them up. Contrary to popular belief, the Mortgage Agreement isn’t actually the loan itself; it’s not the money changing hands. The mortgage agreement, also referred to as the Mortgage Contract or Mortgage Form, specifically places a lien on the property while the borrower pays back the loan. But why?
Simply put, borrowing for these investments means receiving a loan. Without the mortgage agreement, however, the loan works just any standard promissory agreement: You promise to pay the loan amount (in installments) in full.
Both residential and commercial real estate are expensive investments. The mortgage agreement helps to guarantee the loan will be repaid by placing a lien on the property, which provides repayment incentive since the property itself is used as the collateral.
Depending on the lender, the exact language on the mortgage contract will vary somewhat, but there will almost always be a few sections covered, regardless who you may be borrowing from.
- Basic information regarding the loan, such as total borrowed and any additional associated costs.
- References to other loan documents which set forth the exact terms of the loan, including repayment term, payment, and interest rate.
The specifics of your loan may vary, but remember: These are the items you can generally expect to see on any mortgage agreement, whether or not you’re interested in commercial real estate investing.
Mortgage Agreement Fees and Rates
Much like the sections contained within the contract, the fees described by the mortgage agreement vary from lender to lender. Here’s a brief overview of some common fees associated with mortgages:
- Loan origination cost – An up-front fee charged by a lender for the processing of a new loan application, usually quoted as a percentage of the total loan.
- Broker fees – Charged by an agent or agent’s company, this fee is processed for conducting transactions between seller and buyer which might include purchases, sales, negotiations, or advice.
- Closing costs – Incurred by either buyer or seller, these fees are paid at the closing of the transaction, or when the title to the property is transferred to the buyer.
- Points – A special type of fee, these are paid in exchange for a reduction of the interest rate on your loan.
There can be many costs associated with a loan, so be sure to understand the details of your mortgage agreement. Even minor differences between lender fees stack up over the repayment of your loan, so make sure you are aware of all fees.
Though specifics vary, the mortgage loan industry is closely regulated by the government in an effort to protect borrowers’ rights. These protections include the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and others which set standards for the type of information the lender must provide about the loan, and prevent discrimination in the lending process.
While specific laws are in place to provide protections in the lending process, there is also a range of mortgage loan types. Some provide preferential rates and terms, and some are eligible only for certain groups, such as senior citizens. All come with individual benefits and protections – one size doesn’t necessarily fit all, but be sure to check out your options.
When do you need a mortgage agreement?
There’s a wide array of uses for the mortgage agreement; in fact, you can use one for nearly any type of physical property, though this discussion is geared toward commercial real estate investing and those looking to understand the real estate investing process better.
There are three situations in which most folks will use a mortgage agreement:
- You manage a company that provides loans.
- You’re lending money to someone to purchase property.
- You’re borrowing money from a lender to purchase property.
Find the Best Lenders when Investing In Commercial Real Estate
Again, even though the general facts about mortgage agreements are consistent, the details vary on a case-by-case basis, and you should treat them with that care. Finding the best lenders, and mortgage agreements, for your commercial real estate investing situation will make all the difference.
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