Types of Mortgage Instruments

A mortgage represents a contract between two parties related to the financing of real property. The lender receives interest payments in exchange for providing cash up front and assuming the risk of a borrower's default in the purchase of property. A variety of mortgage instruments are available to suit your individual needs. Each one may have its own payment terms and procedures for foreclosing on the property.

Conventional Mortgage

A conventional mortgage creates a lien against the property's title until the loan is paid off. If you default on your payments, the lender must go through the judicial foreclosure process to evict you and take possession. You may also take out a second mortgage on a property if there is enough equity remaining after the first to satisfy the second lender's collateral requirements. Second mortgages present a higher risk for lenders because the first lender has priority on repayment after a default.

Deed of Trust

A deed of trust makes it easier for the lender to foreclose than a conventional mortgage. The deed creates a security interest in the property. The trustee is usually a title company or an independent attorney. If the borrower defaults, the trustee can sell the property without waiting for a court order.

Credit Line

A home equity line of credit does not give you cash upfront when you sign the loan. Instead, you are authorized for a line of credit up to a specific limit. The equity in your home is used as collateral to secure the line of credit. The payment amounts vary based on the terms of your HELOC. You may have to make regular principal and interest payments or just pay the interest each month. You may also pay off the entire balance and borrow it back again several times over the life of the loan.

Reverse Mortgage

A reverse mortgage allows you to tap the equity in your home to receive monthly payments. You may stay in the home over the duration of the loan. When you die or move out, you must begin paying the outstanding balance. This can be a problem if the home has gone down in value and you do not get enough at the sale to cover the remaining balance. Reverse mortgages work best for seniors who need cash and do not have any assets other than their homes. If you have children, it might be better for them to apply for a bank loan and lend you the money. They may be required to sell the home to cover the balance on your reverse mortgage after your death.

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