Chapter 15 Mortgages

Mortgages

1. Definition of Mortgage

  • A mortgage is a written document that grants a creditor (mortgagee) an interest in a debtor’s (mortgagor) real property as security for a debt.

  • Example:

    • Bank loans money to a home-buyer (mortgagor).

    • Home-buyer signs a promissory note to repay the loan and uses the funds to buy a home.

    • The home-buyer grants a mortgage to the bank, securing the loan against the property.

    • If the home-buyer fails to repay the loan, the bank can foreclose on the property, sell it by sheriff sale, and receive proceeds from that sale.

  • Creation of Mortgages in Louisiana:

    • Mortgages can be created through a contract or by recording a judgment against the debtor.

2. Types of Mortgages

A. Fixed Rate Mortgage

  • Standard mortgage with a fixed interest rate.

B. Adjustable Rate Mortgage (ARM)

  • Interest rate changes after an initial period, typically starting low for the first 3 years before being readjusted.

C. Interest Only Mortgage

  • Borrower pays only the interest for a specified initial period.

3. Cost Examples

A. Fixed Rate Example

  • 30-year loan of $200,000 at 6.5% results in monthly payments of $1,347.

B. Interest Only Example

  • 30-year loan of $200,000 at 6.5% allows interest-only payments of $1,083 for the first 60 months; after which payments convert to fixed rate or require a balloon payment.

4. Additional Types of Mortgages

A. Subprime Mortgage

  • Secures a high-risk loan for borrowers who do not qualify for a standard mortgage due to poor credit or high debt-to-income ratios.

B. Home Equity Loan

  • A loan secured against the home equity, which is the portion of the home’s value that has been paid off by the borrower.

5. Lender Protections

  • Record Mortgage: In public records to provide notice to third parties.

  • Mortgage Provisions:

    • Prepayment penalty clause to protect the lender if the borrower refinances.

    • Requirement of insurance on the home.

    • Requirement of escrow for taxes.

6. Borrower Protections

  • Truth in Lending: Lenders must disclose all principal, interest, and fees to borrowers.

7. Foreclosure

  • Definition: Occurs if a borrower defaults by failing to make mortgage payments, allowing the lender to foreclose on the property.

  • Ways to Avoid Foreclosure:

    • Forbearance Agreement

    • Loan Modification Agreement

    • Short Sale

    • Sale & Lease Back

8. Steps in Foreclosure

  1. Notice of seizure issued.

  2. Property sold at auction.

  3. Deficiency judgment can be pursued if the sale does not cover the outstanding debt.