Chapter 5

Residential Mortgages

For a great majority of Americans, one of the most important transactions in their lifetime is to purchase a house. It is an important transaction primarily because the price of a house is often several times the annual income of the purchaser. For this reason, the purchase of a house is rarely done in cash. It is almost always financed with a long-term residential mortgage.

This chapter defines what a residential mortgage is, how it works in terms of amortization, the most popular type of mortgage, and a wide variety of other types of alternative mortgages.

Description of a Residential Mortgage

In a general sense, a residential mortgage is a long-term financing instrument that is secured by the pledge of a residential unit (a house or an apartment) by its owner. In most cases, mortgage financing is for the purpose of purchasing the very residential unit that is pledged. Nowadays, however, the mortgage has been used for many additional purposes. For example, a homeowner may obtain a mortgage so that part of the financing proceeds can go toward children's education. In a strict sense, the term mortgage refers only to the pledge of the house given by the borrower (a more technical term is mortgagor) to the lender (the mortgagee), and not the promissory note that secures the mortgage. In a loose term, however, the term mortgage refers to both the pledge of the house as well as the long-term promissory note of financing.1

In the United States, the legal ...

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