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Mortgaging

Updated on May 6, 2010
Photo by Neil Hoskins
Photo by Neil Hoskins

A mortgage is an agreement granting a legal claim on real or personal property, or transferring ownership of it, as security for the payment of a loan. The agreement is made between a mortgagor, or borrower, and a mortgagee, or lender. If the value of the property exceeds the amount of the first mortgage, additional mortgages may be placed on it. If terms of repayment or other conditions of the mortgage are violated, the mortgagee may foreclose the mortgage by taking or compelling sale of the property.

A realty mortgage is on real property. It includes a statement of the debt incurred and a description of the property that secures it. Usually it binds the mortgagor to such promises as to pay all taxes and assessments on the property, keep the buildings in repair, and protect them with insurance. In the United States a realty mortgage usually must be signed, sealed, and delivered to the mortgagee, and it must be recorded in the county where the property is situated. An unrecorded mortgage is binding on a person who agrees to it, but it is not binding on a person who buys the property or later mortgagees or other creditors, if such persons had no knowledge of the earlier mortgage.

When a piece of real estate is sold in a foreclosure sale, the money is applied to paying off any recorded mortgages in the order of their dates of record. Any unrecorded mortgage taken out before recorded mortgages is paid according to the mortgage date if the holders of the recorded mortgages knew about it; otherwise it is paid after the recorded mortgages. If the money from the foreclosure sale does not cover the total debt, interest, and legal costs, unpaid mortgagees may sue the mortgagor for what is owed. If money is left over, it goes to the mortgagor.

A chattel mortgage is a mortgage on personal property, such as a car. The laws of most states provide that chattel mortgages must be recorded with the appropriate public official unless the mortgaged property is delivered to and retained by the mortgagee. An unrecorded chattel mortgage is subject to the same limitations and difficulties as an unrecorded realty mortgage.

Under the old English common law a mortgage conveyed actual ownership of the mortgaged property to the lender with the provision that the conveyance became void if repayment was made according to agreement. In England this common law, or title, theory was followed until the Law of Property Act in 1925. The act introduced the equity mortgage, or lien, in which the mortgagor retains ownership of the property and the mortgagee has a lien, or legal claim, against it if the debt is not paid. In the United States 14 states follow the title theory, about 25 have adopted the lien theory, and the rest follow some variation of one or the other.

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