What Is a Mortgage Used to Purchase?
A mortgage is a special type of secured loan. The mortgage is special because the money borrowed is always secured by real property. Real property is any interest in land, including raw land, structures on land and fixtures that are a permanent part of the land. Real property for mortgages includes fee title to land as well as long-term leases in land.
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Residences
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The most common use for a mortgage loan is to purchase a principal residence or family home. Most people don't have the cash saved up to go out and purchase a home to live in, so instead they borrow money from a bank, credit union or other mortgage lender. The mortgage lender takes a mortgage lien on the home to secure the mortgage loan. The borrower takes the money borrowed and uses it to purchase the home or construct the home.
Other Types
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A mortgage loan, however, does not have to be used to purchase a home. The defining aspect of a mortgage loan is that the loan is secured by an interest in real property. The money borrowed does not necessarily have to be used to purchase or construct on the real property. Some entrepreneurs, for example, will take out a mortgage loan in order to raise funds to start their business. Others take out mortgage loans to pay off other debt, such as credit cards and student loans.
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Features
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Not all mortgage loans are similar. The defining feature of the mortgage loan is that the lender takes a security interest, called a lien, in the borrower's real property. The lein allows the lender to foreclose on the real property if the borrower defaults and retain the mortgage loan. Foreclosure involves the sale of the collateral to raise money to pay off the mortgage loan. A mortgage is not defined by what the money is used for.
Benefits
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The primary benefit of taking out a mortgage loan rather than another type of loan such as a business loan or personal loan is that interest rates on mortgage loans are typically much lower than they are on other types of loans. The reason interest rates are lower is because the mortgage lien reduces the lender's risk on the loan. Lower risk equals lower interest rates. The lender has lower risk because if the borrower defaults, then the lender has a security interest in the collateral and can generally satisfy the outstanding balance on the loan by foreclosing on the collateral.
Expert Insight
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Although from a legal perspective a mortgage loan does not have to be used to purchase real property, many mortgage lenders make this a condition of receiving the loan funds. Many mortgage lenders will require the borrower to use the money to purchase or improve the property serving as collateral. For example, if you take out a mortgage on your home, many lenders will require that the money be used to remodel, reconstruct or otherwise improve and increase the value of your home. Of course, these requirements vary from lender to lender, and from loan to loan.
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References
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