Mortgage: Definition, Example and Related Terms
What is a Mortgage ?
What's the difference between a loan and a mortgage?
A loan is a broader term that refers to any amount of money borrowed that is expected to be paid back with interest.
A mortgage on the other hand is a specific type of loan used to purchase real estate. Here are the key features that classify a loan as a mortgage
- Secured by Real Property
- Lien on the Property
- Foreclosure Rights
- Transfer of Title
Are mortgages used outside of real estate?
Mortgages are specifically tied to real estate because they must be tied to real property which is immovable such as land or buildings. The property serves as collateral for the loan. There are special legal frameworks such as foreclosure which are designed to deal with this type of asset.
There is something called a Chattel Mortgage which allows moveable assets such as vehicles or equipments to be purchased. In those circumstances, the legal mechanism on default would be Repossession. It's typically associated with vehicles or machinery or other high value assets.
Scenario Description Let's say a company wants to expand its operations and needs to acquire a new factory. The cost of the factory is $1 million, but the company only has $200,000 in cash. It decides to take out a mortgage for the remaining $800,000. In this scenario, the company would approach a bank or another lender and apply for a mortgage. If approved, the bank would give the company the $800,000 it needs to buy the factory. The company would then pay the bank back, plus interest, over a set period of time (like 15 or 30 years). The factory acts as collateral for the loan. If the company fails to make its mortgage payments, the bank can take possession of the factory and sell it to recover the money it lent.