A mortgage (from the legal French for dead pledge) is a security interest under common law that was developed out of the law of equity and the ownership of real property in fee simple. It now also has applications in the law of personal property, particularly motor vehicles, aircraft, boats and ships. In modern use, it is treated as a charge.
Although there is a similar instrument under a civil code, the hypotec, the two are distinctly different and have important differences.
A mortgage is at its heart a particular type of loan agreement that takes place between the lender, the mortgagor, and the borrower, the mortgagee. It always involves a piece of real property or personal property to which the charge attaches. It has several key features:
- On default of payment of the loan, the lender may force the sale of the pledged property to pay the loan and any associated costs, with the surplus going to the borrower.
- In the alternative, the lender may, at their sole discretion, instead take posession of the property and become the registered owner (foreclosure)
- However, if the lender forecloses, the borrower may make a request in court that the property be sold instead (a request for sale). However, if there is a shortfall, the borrower must make up the difference.
- In the alternative, if the lender attempts to foreclose or sell, the borrower may request to redeem - pay off the entire amount owing under the mortgage in it's entirety.
However, mortgages have several different forms, and there are even important differences between common law jurisdictions. For example, many states only allow non-recourse mortgages, where if there is a shortfall in the sale price of the property, the lender may not pursue the borrower for the difference. In most cases, a mortgage requires monthly payments of interest and principle, but all mortagages have a maturity date on which they must be paid in full. Sometimes, this is at the end of the amortization period (the total series of monthly payments), but others are for a term of one to five years where the amortization period is longer and the borrower must pay off the entire amount at the end of the term (usually by negotiating a new mortgage).
The lender may always assign the rights under the mortgage to another party, unless there is a term in the mortgage the prohibits this.