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How Mortgages
Came To Be
How Loans Started
Why We Pay Interest
Glossary of Mortgage Terms
Buying a New Home
Consolidation Loans
How to Handle Credit Card Debt
All
About Equity Loans
Home Mortgage Loans
How Mortgages Came To Be
You might think that the
mortgages we know and enjoy these days have been around for 100’s of
years. But in reality, conventional mortgages have been in
existence for slightly more than 70 years. The evolution of the
mortgage is a fascinating story.
The Creation of the Mortgage
The idea of offering a mortgage
did not originally come from banks or other lending institutions.
In fact, it came from the Insurance industry.
Lawyers, 150 years ago, as
today, were responsible for making sure that property titles were
registered accurately and properly. It became apparent, through the
court system, that a number of people were losing their homes
because lawyers and notaries were giving erroneous title
information. Thus, title insurance was created in response to the
need for reliable assurance to cover the loss caused by errors in
reporting the status of title. In 1874, Pennsylvania enacted the
first statutes authorizing the issuance of title insurance.
From 1900 to the early 1930’s,
the title insurance industry began to grow rapidly. The insurers
were able to convince third-party lenders that title insurance was
necessary for the financing of residential properties.
But mortgages back then were not
as they are now. In many cases, a person applying for a mortgage
had to have an 80% down payment. And the term of the mortgage was
for 3-5 years, with interest being the only payments. Then at the
end of the term, the homeowner was responsible for a balloon
payment, which meant they had to pay off the entire
mortgage.
A cynical view in those days was
that the insurance companies were not in the business of making
money though fees and interest, but rather, like a vulture, hoping
that the homeowner could not make the final balloon payment, and
thus lose their home.
The Great Depression
With the stock market crash of
1929, and the resulting depression in the early 1930’s, many people
lost their homes and property because they were out of work and
could not make the balloon payments on their mortgages. Also, many
lost their homes because they were unable to pay their property
taxes.
The Modern Mortgage
Shortly after the Great
Depression, the Federal Government got involved. The majority of
people had become renters, not homeowners. So, to get the American
population back into home ownership, the Federal Housing
Administration developed the
modern mortgage in 1934.
The modern mortgage included
these changes:
-
The FHA also started the
practice of qualifying people for mortgages, to ensure that they
could afford the payments. Up until that time, quite often a
mortgage was granted to people based on “who they knew”.
-
The FHA also created the
“amortization” of mortgages. As mentioned earlier, people were
losing their homes because they couldn’t come up with the balloon
payment at the end of the loan term. With amortization,
homeowners could now pay a little bit of the principal every
month, instead of just making interest payments. At the end of
the loan term, no balloon payment was necessary.
-
And the FHA ensured that all
lending institutions employ Escrow Mortgage accounts. That meant
that with every monthly payment of interest and principle, the
homeowner would also pay a little bit extra to cover insurance and
property taxes (PITI – Principal, Interest, Taxes, Insurance). The
lending institutions would make the payments to the government on
behalf of the homeowner.
Finally, after the Second World
War ended, the government wished to lend Veterans money for
mortgages so they could own homes as well. They extended the
regular term of the mortgage from 15 to 30 years. It was so popular
that conventional banks and lending institutions followed suit, and
we haven’t looked back since.
About The Author
David Morris is a successful
freelance writer providing tips and advice for consumers on
mortgages,
personal loans and
equity loans. Many have commented
that his articles have made financial topics easy to understand.
This article from "articles
for free" is reprinted with permission.
©
2004 - Articles-For-Free.com
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How Loans Started
“To loan or not to loan”
The
age-old question is whether to loan money or not to loan money. And
if you do, should you charge interest. Philosophically, there are 3
schools of thought. One says that if you lend someone money, don’t
expect repayment. The borrower needs the money badly,
and if someone loans money, they should do so for no reason other
than benevolence, and they should never "expect" repayment.
The
borrower may promise repayment, but if they fall on hard times and
cannot repay the loan, the lender should accept that fact. The
thinking being that the lender should never have lent out the money
if they couldn’t afford to lose it in the first place. It’s the
same mentality as taking your money to the casinos of Las Vegas.
The 2nd
philosophy is that if money is lent out, then it must be repaid.
But no interest should be collected. Most people
feel bad about having to borrow money in the first place. There's no
need to make them feel worse by hounding them for interest. It’s
like lending a rake to your neighbor. When he’s finished, he’ll
return it. You don’t charge him interest.
And of course, the 3rd philosophy, and the one we
have come to embrace is the aspect of the commercial, business or
personal loan tied directly to repayment plus interest. This is
what banks and loan companies generally subscribe to.
But when did all the money
lending start.
The First Money
Money, both in the paper and coin
form, is not the original way humans bought things. If fact, money
as we know it today is rather a recent concept. In the past,
civilizations would trade cattle or grain. And that was all well
and good if you want cattle or grain in exchange.
But what happened when the person who has
what you need did not want what you have. There had to be some form
of currency that could be traded in those circumstances. Something
of real value, a currency that everyone could agree on.
African tribes traded bright
metal objects call Manillas, Canadian natives traded beads and
beaver pelts, while other civilizations have traded animal teeth,
ivory, and feathers, to name a few. As long as the people think that
these things have value, then everything is fine.
Tally sticks were introduced by
King Henry the First around 1000 AD. They were basically sticks of
polished wood with notches cut out of them to indicate the
denomination. The stick was then split down the middle, with the
king keeping half of the stick to prevent against counterfeiting.
The king accepted these sticks
as payment for taxes, so the people had confidence that these sticks
had
value, and therefore traded
them for other goods and services. This practice continued for over
700 years.
The First Banks
The earliest banks were not the
kind of banks that we know, but rather temples that were used to
store grain and other commodities for trade, way back in Mesopotamia
about 5000 years ago. The fundamental banking principles used there
and in Babylon, the birth place of banking, have remained relatively
the same until this present day.
Early Lenders
Judah was captured by the
Babylonians about 650 B.C.. The Jewish people were taken to
Babylonia and held there for 70 years. While there, a man named
Jacob Egibi became one of the first known men to set up a business
for loaning out money for profit. Thus started the concept of
private banking. At the end of the captivity period, the Jewish
people were sent back to Judah, but because of the lucrative
business some had developed, some, like Jacob Egibi did not want to
return.
This practice of loaning out
money, which evolved into Loan sharking with interest rates of
30%-50%, continued right up until the time of Christ. When the
Christian era became well established, right up until about 500
years ago, charging interest was banned.
In
fact, kings such as Alfred the Great, King of
England; 849-901 A.D. and James 1, King of England; 1566-1625 A.D.
had edicts that forbade taking interest, and men would be banished
from England if they were found taking a “usury fee”.
Let the Money Flow
Banks started to appear in
Britain from the mid-seventeenth century. They were started by
goldsmiths who not only made items with gold, but also began to look
after valuables and
lend money. Gold was a
heavy commodity to carry around, so people would store their gold
with the goldsmiths, and in return they would receive a receipt
indicating the value of gold stored. These were called bank notes,
and because they were easier to carry, they began to get traded like
money, and loaned out like money.
Big Business Today
During the early part of the twentieth century, the practice of
opening bank accounts for saving and to receive wages became very
popular. This was followed by many of the smaller banks disappearing
with large banks being established with many branches.
In the last 30 years, incredible
advances in technology have allowed us to save money and get loans
by telephone and through the internet. The business of loans is now
a well regulated business with many companies, besides bank,
offering their services.
About The Author
Diane French is a successful
freelance writer providing helpful tips and advice for consumers on
mortgages,
personal loans and
equity loans.
Her many years of mortgage industry experience have helped others
understand the business.
This article from "articles
for free" is reprinted with permission.
©
2004 - Articles-For-Free.com
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Why We Pay Interest
The Origins of Interest
The first appearance
of the concept of interest goes back to the days of the ancient
Sumerians. It was based on the concept that if you had a herd of
cattle (let’s say 100 head), and you lent that herd of cattle to
someone else for a year, you would expect that at the end of the
year you would get your 100 head of cattle back plus some extra
cattle, because of new births. That extra amount was interest.
We see roots of the
word “interest” in the Sumerian language. The word for interest is
“mash”, which was also the word for “calve”. For the Greeks, the
word was “tokos” which refers to the “offspring of cattle”. And for
the Egyptians, the word is “ms”, which means “to give birth”.
In a society like
the ancient Sumerians, where the size of your flocks and herds
indicated the size of your wealth, it is easy to conceptualize that
natural occurring offspring (interest) would add to your wealth.
The Early Years
In more modern
America, we are familiar with the concept of raising or lowering the
interest rate to stimulate the economy or avoid inflation. But this
idea is not so new.
In England, during
the 18th century, the economy also reacted to the amount
of interest charged. Normally, interest ran at about 4%. When the
rate was lowered, business increased. When the rate was raised,
business slowed down.
In the Roman days,
interest rates
were similar to our current America. Normal interest rates were at
about 12%. When they wanted to get things moving, they would lower
it to about 6%. For risky loans, they would raise the amount
charged to 24%.
Good or Evil
In some circles, the
concept of making money from loaning it out is sinful or
un-natural. The Ancient Greeks struggled with the concept of
interest. Philosophers such as Plato and Aristotle felt that money
was “barren”, and that no offspring can arise from something that is
barren, therefore no interest should be collected. But this may
have stemmed from the fact that in early Greek days, there was no
imposed restriction on the amount of interest that could be charged
on a
loan,
therefore greedy creditors got very rich. So, to counteract this,
they banned interest.
Over time, as the Greek empire gave
way to the Roman empire, the Roman’s reinstated interest, but
ensured that “gouging” did not occur, by regulation and establishing
specific rates.
Hmm…What to call it
To stay within the
law (or avoid the law, depending on how you look at it), various
types of interest have been established over the years. For
example, to skirt the issue of charging a certain interest rate,
some lenders have charged a “fee for service” which eliminates the
term “interest”. The end result is the same for the borrower, it’s
just called something else.
Another way to circumvent the term “interest” was to charge a
penalty fee for late repayments of principal. The penalty amount
was agreed upon before time, and it was also agreed that the
borrower would “breach” the contract by making a late payment,
therefore insuring that the lender received his penalty payment, or
“interest”.
Sometimes the “interest” would be collected as a fee for lost
opportunity cost. It was reasoned that a borrower really needs that
money today, and they will promise to pay back more in the future
after making profits with the money. The lender receives a payment
because of his lost opportunity cost.
Another thought is that if the money loaned was for the purpose of
investment, then the lender and borrower could agree on a
compensation from the profits of the investment. The exact amount
of the profit sharing would be determined before hand.
Here to Stay
But one thing remains apparent, “interest” or whatever we have
wished to call it through the ages, is here to stay. In fact, for
the most part, it’s always been with us, because there is always a
cost for the use of money.
About The Author
Diane French is a successful
freelance writer providing tips and advice for consumers on
mortgages,
personal loans and
equity loans. Her many years of
mortgage industry experience have helped others understand the
business.
This article from "articles
for free" is reprinted with permission.
©
2004 - Articles-For-Free.com
Back to Top
Glossary of Mortgage Terms
B C D
E F G
H I J
L M N
O P Q
R S T
Z
A
Adjustable Rate Mortgage (ARM):
A mortgage that lets the lender adjust the interest rate
periodically according to a pre-selected index. Payments may go up
or down according to this adjustment.
Acceleration clause:
The lender has the right to demand payment of the entire outstanding
balance when the first monthly payment is missed. This is a
provision written into a mortgage.
Amortization:
The systematic and continuous payment, through installments, of a
mortgage
Amortization schedule:
The schedule showing the amount of each payment applied to interest
and principal and the balance remaining.
Annual Percentage Rate (APR):
The total
yearly cost of a mortgage, on an annual rate, expressed as a
percentage. It usually includes a combination of the interest rate,
a loan origination fee known as points, and certain other fees paid
to a lender to acquire a mortgage. The APR is the most meaningful
measure for comparing the cost of mortgage loans offered by
different lenders.
Application:
A form
used by a mortgage lender, either on paper or online, to record
necessary information concerning a potential mortgage.
Application Deposit:
An amount of money paid to cover expenses such as the appraisal and
credit report, during the initial mortgage processing.
Appraisal:
A
professional opinion of the market value of a property. The term
also refers to the process by which this estimate is obtained.
Appreciation:
A
rise in the value of a property due to changes in market conditions
or other causes.
Assessed
value:
The
valuation placed upon real property by a taxing authority for
purposes of taxation.
Assessment:
A charge
against a property for purposes of taxation, such as when the
property owner pays a share of the cost of community improvements
according to the valuation of the property.
Assumable
mortgage:
This
is a mortgage that can be assumed, or taken over, by the buyer when
a home is sold. This is also called “assumption”.
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Binder:
When a
buyer agrees to purchase real estate, a binder is a preliminary
agreement, secured by the payment of money.
Borrower:
A person who receives funds in the form of a loan or
mortgage, with an obligation to repay principal with interest.
Buydown:
This is a
method of reducing the interest rate on a loan by making a payment
to the lender from the seller, buyer or third party.
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Cap:
A
stipulation of an ARM determining how much the interest rate or
mortgage payments may increase or decrease.
Cash
reserve:
A
condition of some lenders that buyers have enough cash remaining
after closing to make the first two monthly mortgage payments.
Cash to Close:
Cash
that is readily available to be used to cover the down payment,
closing costs, and prepaid items of a mortgage transaction.
Certificate of Occupancy:
A certificate issued by a local building department to a builder or
renovator, indicating that the building is in proper condition to be
occupied and stating the legally permissible use of that building.
Clear
title:
A
title that has no legal questions as to who owns the property, and
that it is free of liens.
Closing:
A meeting,
sometimes called a settlement, during which the title to the
property actually changes hands, and the buyer signs the mortgage
documents and pays the closing costs
Closing
Costs:
Also called “settlement costs”, this is money paid by the borrower
to cover expenses such as an origination fee, discount points,
appraisal, credit report, title insurance, attorney's fees, a
survey, and any other expenses in connection with the closing of a
mortgage loan.
Closing
Statement:
A document used at closing that shows the funds received and paid at
the closing, including the escrow deposits for taxes, hazard
insurance, and mortgage insurance.
Co-Borrower:
Additional applicants on a loan whose income helps to qualify for a
loan and whose name appears on documents with the same legal
obligations.
Collateral:
Property (such as securities) pledged by a borrower to protect the
interests of the lender.
Commitment letter:
A
lender's written offer stating the terms, the amount of the loan,
the interest rate and any other conditions under which it agrees to
lend money to a homebuyer.
Commitment (Loan):
A binding
agreement made by the lender to the borrower to make a loan, usually
at a stated interest rate within a given period of time for a given
purpose, subject to the borrower meeting certain conditions.
Commitment
Fee (Loan):
Any fee paid by a potential borrower to a lender for the lender's
promise to lend money at a specified rate and within a given time
period.
Condominium:
A
structure of two or more units in which the homeowner holds title to
an individual dwelling unit, an undivided interest in common areas
of a multi-unit project, and sometimes the exclusive use of certain
limited common areas. The balance of the property is owned in
common by the owners of the individual units.
Contingency:
A
condition that must be met before a contract is legally binding.
Contract of Sale:
Written
contract signed by a seller and a buyer in which both parties agree
to the sale under certain specific terms and conditions. Also called
a purchase contract.
Conventional mortgage:
Any
mortgage that is not insured or guaranteed by the federal government
(such as FHA or VA).
Convertible ARM:
Under specified conditions, this is an adjustable-rate mortgage that
can be converted to a fixed-rate mortgage.
Cooperatives (Co-ops):
A
structure of two or more units in which the residents own shares in
the corporation that owns the property, giving each resident the
right to occupy a specific apartment or unit.
Counteroffer:
a
return offer made by one who has rejected an offer.
Covenant:
A
clause in a mortgage that obligates or restricts the borrower and
that, if violated, can result in foreclosure. Most commonly,
assurances set forth in a deed by the grantor or implied by law.
Credit report.
A report detailing an individual's credit history, usually prepared
by a credit bureau and used by a lender in determining a loan
applicant's creditworthiness.
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Deed:
A legal
document conveying title to real property from one individual to
another.
Deed of Trust: The
document used in many states instead of a mortgage; title is
conveyed to a trustee rather than to the borrower (trustor), in
favor of the lender (beneficiary) and reconveyed upon payment in
full.
Default:
The
failure to perform an obligation as agreed in a contract, such as
making a mortgage payment on a timely basis or to comply with other
requirements of a mortgage.
Delinquency:
A
loan payment that is overdue but within the period allowed before
actual default is declared.
Deposit:
An amount
of money (also called earnest money) given to bind a sale of real
estate.
Depreciation:
A
decline in the value of property, perhaps brought about by age,
deterioration, functional or economic obsolescence.
Discount points:
See Points.
Down
payment:
The
initial payment of cash towards the purchase price which the buyer
pays and does not finance with a mortgage.
Due-on-sale clause:
A
stipulation in a mortgage that states that the borrower must pay the
lender in full if the borrower sells the property.
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Earnest money:
As evidence of good faith, a deposit made by the potential homebuyer
to show that he or she is serious about buying the house.
Easement:
A right of way giving persons other than the owner access to or
over a property.
Encroachment:
Physical items such as a wall, fence, building, etc., on the
property of another.
Equal
Credit Opportunity Act (ECOA):
A Federal law requiring lenders and other creditors to make credit
equally available without discrimination based on race, color,
religion, national origin, sex, age, marital status, receipt of
income from public assistance programs or past exercising of rights
under the Consumer Credit Protection Act.
Equity:
The difference between the market value of property and any
outstanding mortgages, loan balances or other encumbrances on the
property.
Escrow:
Funds held by the lender, set aside for payment of taxes and
possible property and mortgage insurance and other recurring charges
against real property.
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Fair Credit Reporting Act (FCRA):
When a lender turns down a potential borrower because of poor
credit, a Federal law requires the lender who is declining the loan
to inform the borrower of the source of such information.
Federal
Home Loan Mortgage Corporation:
Known as Freddie Mac, this is a corporation authorized by Congress,
which purchases residential mortgages insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans Administration
(VA) as well as conventional home mortgages. It sells participation
certificates whose principal and interest are guaranteed by FHLMC.
Federal National Mortgage Association:
Known as Fannie Mae, this is a corporation authorized by Congress to
support the secondary mortgage market. It purchases and sells
residential mortgages insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA) as well as
conventional home mortgages.
Finance Charge:
The total dollar amount your loan will cost you, which includes your
origination fee, all interest payments during the term of the loan,
any interim interest paid at closing, and any other charges paid to
the lender or to a third party. Certain charges like the appraisal,
credit report and the title search charges are not included in the
finance charge calculation.
First
Mortgage:
The
first mortgage on a property that has priority over any subsequently
recorded
mortgages.
Fixed
Interest Rate:
An interest rate which does not fluctuate during the term of the
loan.
Flood
Insurance:
Insurance required by lenders in areas designated as potential flood
areas, protecting against loss by flood damage.
Foreclosure:
When a borrower defaults on the debt, the property mortgaged as
security for a loan is sold to pay the defaulting borrower's debt.
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Good Faith
Estimate:
An estimate, by the lender, which outlines the likely expenses to be
incurred in connection with a settlement.
Gross
Monthly Income:
Total monthly income earned before tax and other deductions.
Guaranteed
Loan:
A loan that is “backed” or guaranteed by the Federal Government,
such as Veteran's Administration or Rural Development. The guarantee
protects the lender against loss by the borrower defaulting on a
mortgage.
H
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Hazard
insurance:
Insurance protecting against loss to real estate from physical
damage, from fire, wind, vandalism, or other hazards.
High-Ratio
Loan:
Where the mortgage loan exceeds 80% of the sales price or appraised
value.
Homeowners' Association Dues:
The monthly or annual fees charged by a condominium or homeowners'
association for maintenance of common areas.
Homeowner's insurance:
An
insurance policy that combines personal liability coverage and
hazard insurance for a building and its contents.
Housing
Ratio:
Sometimes called the payment-to-income ratio, it’s the ratio of the
monthly housing payment (PITI) to total gross monthly income.
Homeowner's warranty:
A type of warranty or insurance, provided by the builder or seller,
that covers repairs to specified parts of a house for a specific
period of time.
I
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Index:
A rate to which the interest rate on an Adjustable Rate Mortgage is
tied. The interest rate may go up or down depending on whether the
index rate goes up or down.
Insured
Loans:
A loan insured by FHA or a private mortgage insurance company.
Interest:
Either a) a fee charged for borrowing money, or b) A share or right
in some property.
Interest
rate cap:
Also called a Life Cap or Life Rate, it’s how much interest rates
may increase or decrease per adjustment period or over the life of a
mortgage.
Investment
Property:
Property owned, but not occupied by the owner, with the intent of
earning income.
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Joint
tenancy:
Joint ownership by two or more persons giving each person equal
interest and equal rights in the property, including the right of
survivorship.
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Late
charge:
A
cash penalty a borrower must pay when a mortgage payment is made
after the due date.
Lease-Purchase Mortgage Loan:
Low to middle income homebuyers are able to lease a home from a
non-profit organization with an option to buy. It’s an alternative
Fannie Mae financing option.
Lien:
An
encumbrance against a property for money due, that must be paid off
when the property is sold.
Lifetime
cap:
Also called an Interest Cap, it dictates how much interest rates
may increase or decrease per adjustment period or over the life of
an Adjustable Rate Mortgage.
Loan
commitment:
Also called a Commitment letter, it’s a lender's written offer
stating the terms, the amount of the loan, the interest rate and any
other conditions under which it agrees to lend money to a homebuyer.
Loan
servicing:
The responsibility of collection of mortgage payments from
borrowers.
Loan-to-value percentage (LTV):
The
comparison between the outstanding unpaid principal of the mortgage
and the lower of the appraised value, or sales price, of the
property.
Lock-in:
A written guarantee stating that the homebuyer will receive a
specified interest rate and points to be paid at closing, provided
the loan is closed within a set period of time.
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Margin:
The number of percentage points a lender adds to the index value to
calculate the ARM interest rate at each adjustment period.
Market
Value:
The
highest price which a buyer would pay and a seller will accept, for
a property. The market value may be different from the market.
Maturity:
The end or final due date on which final payment on a mortgage must
be paid in full.
Monthly
Payment:
Consisting usually of principal, interest, taxes, and insurance,
this is the amount that must be paid each month on a mortgage loan.
Mortgage:
A legal document that pledges a property to the lender as security
for the payment of a loan.
Mortgage
banker:
A
banker that issues mortgages for resale in the secondary market.
Mortgage
broker:
An individual or company that acts as a “go-between” for borrowers
and lenders for a fee.
Mortgage
Disability Insurance:
In the event of a disability of an insured borrower for a specified
period of time, this is an insurance policy which will pay the
monthly mortgage payment.
Mortgage
Insurance:
Insurance protecting the
mortgage lender against
financial loss due to a mortgage default.
Mortgage
insurance premium (MIP):
The consideration paid by a mortgagor (borrower) to the FHA or a
private insurer for mortgage insurance.
Mortgage
Life Insurance:
In the case of a death of a covered borrower, this is a term life
insurance policy that covers the declining balance of a loan secured
by a mortgage, and is payable to the lender.
Mortgage
margin:
The
set percentage the lender adds to the index value to determine the
interest rate of an ARM.
Mortgage
note:
A
written promise to pay a sum of money at a stated interest rate
during a specified period of time, and the mortgage note is secured
by a mortgage.
Mortgage
interest rate:
The
rate of interest in effect for the monthly payments.
Mortgagee:
The
lender in a mortgage agreement.
Mortgagor:
The
borrower in a mortgage agreement.
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Negative
amortization:
This is when the monthly payments cover only part of the interest
then due. The amount of the shortfall is added to the unpaid
principal balance to create additional principle.
Non-Conforming Loan:
For various reasons, including loan amount and loan characteristics,
these are loans that usually have a higher interest rate and
origination fee because they are not eligible for sale and delivery
to either Fannie Mae or Freddie Mac
Note:
A written agreement containing a promise of the signer to pay to a
named person, or bearer, a definite sum of money at a specified date
or on demand.
Notice of
default:
A formal written document to a borrower that a default has occurred
and that legal action may be taken.
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