Mortgage Markets

What is Mortgage Markets?

A mortgage is a debt instrument, secured by the collateral of

specified real estate property, that the borrower is obliged to pay
back with a predetermined set of payments.

Debt Instrument - are assets that require a fixed payment to the

holder, usually with interest. Examples of debt instruments include
bonds (government or corporate) and mortgages. The equity
market (often referred to as the stock market) is the market for
trading equity instruments.

Who Uses a Mortgage?

Individuals and businesses use mortgages to make large real estate

purchases without paying the entire purchase price up front. Over
many years, the borrower repays the loan, plus interest, until she
or he owns the property free and clear. Mortgages are also known
as "liens against property" or "claims on property." If the borrower
stops paying the mortgage, the lender can foreclose. They are a
form of incorporeal right.

In a residential mortgage, a homebuyer pledges their house to the

bank or other type of lender, which has a claim on the house should
the homebuyer default on paying the mortgage. In the case of a
foreclosure, the lender may evict the home's tenants and sell the
house, using the income from the sale to clear the mortgage debt.

Mortgage Payments

Mortgage payments usually occur on a monthly basis and consist of

four main parts:

1. Principal

The principal is the total amount of the loan given. For example, if
an individual takes out a Php250,000 mortgage to purchase a
home, then the principal loan amount is Php250,000. Lenders
typically like to see a 20% down payment on the purchase of a
home. So, if the Php250,000 mortgage represents 80% of the
home’s appraised value, then the home buyers would be making a
down payment of Php62,500, and the total purchase price of the
home would be Php312,500.

2. Interest

The interest is the monthly percentage added to each mortgage

payment. Lenders and banks don’t simply loan individuals money
without expecting to get something in return. Interest is the money
a lender or bank earns or charges on the money they loaned to
home buyers.

3. Taxes

In most cases, mortgage payments will include the property tax the
individual must pay as a homeowner. The municipal taxes are
calculated based on the value of the home.

4. Insurance

Mortgages also include homeowner’s insurance, which is required by

lenders to cover damage to the home (which acts as collateral), as
well as the property inside of it. It also covers specific mortgage
insurance, which is generally required if an individual makes a down
payment that is less than 20% of the home’s cost. That insurance is
designed to protect the lender or bank if the borrower defaults on
his or her loan.

What is the primary mortgage market?

The primary mortgage market is where borrowers go to obtain

home loans directly from primary lenders.

These lenders include:

 Mortgage bankers.
 Mortgage brokers.
 Commercial banks.
 Credit unions.
 Savings and loans associations.

Primary lenders usually lend money to the public (you) and then sell
a large number of the notes to investors in the secondary market.
The primary mortgage market is where mortgage loans originate.
Who is the primary mortgage market for?
The primary mortgage market is ideal for the average homeowner.

Where you are an individual or have a family of your own, the

various types of primary lenders mentioned above are typically
going to be open to working with you.

This is the first place the average borrower should go to obtain a

mortgage loan to finance the purchase of a house.

Advantages of the primary mortgage market

As you can tell by now, the primary mortgage market is the most
viable option for consumers. Here are its main advantages.

1. Flexibility. Even if your financial situation doesn't fit the norm,

most primary lenders are flexible enough to consider other
solutions.

2. Convenience. Primary lenders are locally-based, which makes it

easy for you to deal with them directly. This also means they are in
touch with the local market and can make decisions quickly based
on its conditions.

3. Low cost. Primary lenders usually do all the underwriting and

loan documentation in-house. This minimizes the costs that are
associated with closing a loan.

4. Smaller down payments. Primary lenders don’t usually require a

huge down payment.

What is the secondary mortgage market?

The secondary mortgage market is the mortgage market in which

primary lenders sell mortgages to investors such as:

1. Insurance companies.
2. Mortgage banking companies.
3. Pension funds.
4. The federal government.

These investors become the secondary lenders.

Advantages of the secondary mortgage market

If your situation calls for the secondary mortgage market, here are
the main advantages you can look forward to.

1. Fixed rates. Secondary lenders usually offer long-term fixed rates

up to thirty years. This means that the principal and interest remain
constant over time even when there are changes with taxes and
insurance.

2. Little or no down payment. Unlike the primary mortgage market,

it is possible to obtain a mortgage from the secondary mortgage
market with little or no down payment.

Characteristics of Mortgage

 A mortgage can be effected only on immovable property, the

immovable property includes land, benefits that arise out of
things attached to the earth like trees, buildings, and machinery.
But a machine that is not permanently fixed to the earth and is
shiftable from one place to another is not considered to be
immovable property.
 A mortgage is the transfer of an interest in the specific immovable
property and differs from sale wherein the ownership of the
property is transferred. Transfer of an interest in the property
means that the owner transfers some of the rights of ownership
to the mortgagee and retains the remaining rights with himself.
For example, a mortgagor retains the right to redeem the
property mortgaged.
 The object of transfer of an interest in the property must be to
secure a loan or performance of a contract which results in
monetary obligation. Transfer of property for purposes other than
the above will not amount to the mortgage. For example, a
property transferred to liquidate prior debt will not constitute a
mortgage.
 The property to be mortgaged must be a specific one, i.e., it can
be identified by its size, location, boundaries, etc.
 The actual possession of the mortgaged property need not always
be transferred to the mortgagee.
 The interest in the mortgaged property is re-conveyed to the
mortgage on repayment of the loan with interest due on.
 In case the mortgager fails to repay the loan, the mortgagee gets
the right to recover the debt out of the sale proceeds of the
mortgaged property

Different Types of Mortgage

1. Simple mortgage

A simple mortgage is one where;

Without delivering possession of the mortgaged property, the

mortgagor binds himself personally to pay the mortgage money and
agrees expressly or impliedly that in the event of his failure to pay
according to his contract, the mortgagee shall have a right to cause
the mortgaged property to be sold and the proceeds of the sale to
be applied so far may be necessary, m the payment of the
mortgage money.

2. Mortgage by conditional sale

Mortgage by conditional sale is one where the mortgagor ostensibly

sells the mortgaged property on the condition that –

 On default of payment of the mortgage money on a certain date

the sale shall become absolute, or

 On such payment being made the sale shall become void, or

 On such payment being made the buyer shall transfer the

property to the seller.

3. Usufructuary mortgage
A usufructuary mortgage is one where the mortgagor delivers or
agrees to deliver the possession of the mortgaged property to the
mortgagee and authorizes him –

 To retain such possession until payment of the mortgage money,

 To receive the whole or any part of the rents and profits

accruing from the property, and

 To appropriate such rents or profits; (i) in lieu of interest, or (ii)

in payment of the mortgage money, or (iii) partly in lieu of
interest and partly in lieu of the mortgage money.

4. English Mortgage

English mortgage has the following characteristics:

 The mortgagor makes a personal promise to repay the mortgage

money on a certain day.

 The property mortgaged is transferred to the mortgagee. The

mortgagee, therefore, is entitled to take immediate possession
of the property. He/She may, under certain circumstances sell
the mortgaged property without the intervention of the court.

 The transfer is subject to this condition that the mortgagee will

re-transfer the property to the mortgagor upon making payment
of the mortgage money as agreed.

5. Mortgage by deposit, of title deeds

Where a person delivers to a creditor or his/her agent documents of

title to immovable property, to create a security thereon, the
transaction is called a mortgage by deposit of title deeds.

This mortgage does not require registration. It is the most popular

with banks.

6. Anomalous mortgage
A mortgage other than any of the mortgages explained so far. It is
an anomalous mortgage.

Such a mortgage includes a mortgage formed by the combination of

two or more types of mortgages as explained above.

It may, therefore, take various forms depending upon custom, local

usage, or contract.

Four common types of home loans:

1. Fixed-rate mortgages

This is the most common type of mortgage, giving borrowers a set

interest rate on the loan for a set period of years. The most
common terms are 15 years and 30 years

2. Adjustable-rate mortgages

Also called ARMs, these home loans have lower interest rates than
fixed rate mortgages and provide lower payments. They’re only set
for a certain number of years, such as five or seven years, after
which they will be reset periodically (often every month).

3. Home equity lines of credit

Called HELOC for short, these loans allow homeowners to borrow

against their home’s equity, usually up to 80 percent of a home’s
value. Good credit and income are often required also.

HELOC loans are commonly used to pay for home improvements,

though they can also be used to pay for college, big purchases and
other expenses.

The potential problem with these loans is if the home’s value

declines, the borrower could owe more for the HELOC loan than the
house is worth. The interest rates are variable and payments only
cover interest in the early years.

4. Reverse mortgages
Formally called a Home Equity Conversion Mortgage, or HECM, this
is the Federal Housing Administration’s reverse mortgage program
that allows equity to be withdrawn from a home. The money doesn’t
have to be paid back until the borrower dies or sells the home.

It’s meant for older homeowners and is usually used to supplement

Social Security, pay unexpected medical bills and make home
improvements. It can also be used to fund retirement.

Reverse mortgage homeowners must be at least 62 years old and

either own their home outright or have a low mortgage balance that
can be paid off at closing with proceeds from the reverse loan.
Borrowers must also have the resources to pay property taxes and
insurance, and they must continue living in the home.

A reverse mortgage doesn’t require monthly payments. It does the

opposite by paying the borrower, though taxes and other home
ownership costs must continue being paid by the owner.