Word of the Day - Mortgage

A legal document used to secure the performance of an obligation. The term mortgage, which is derived from the French words mort meaning “dead” and gage meaning “pledge,” is appropriate in that the pledge is extinguished only after the debt is paid. In the usual real estate transaction, the buyer seeks to borrow money to pay the seller the difference between the down payment and the purchase price. When the lender (mortgagee) lends the money, the buyer/borrower (mortgagor) is required to sign a promissory note for the amount borrowed and to execute a mortgage to secure the debt.

A valid mortgage requires both a debt and a pledge. The mortgage note creates a personal liability for payment on the part of the mortgagor; the mortgage creates a lien on the mortgaged property as security for the debt. Although the note and the mortgage may appear in the same document, it is customary to have separate instruments. Once the debt is satisfied or becomes unenforceable—for example, when the statute of limitations expires—the mortgage is no longer effective security. The mortgage document is lengthy, containing a number of clauses such as provisions for acceleration, subordination, release schedule, defeasance, and waivers. Also included are covenants to pay taxes, to keep the premises in repair, and to maintain adequate insurance. If the mortgagor fails to pay taxes or insurance premiums, the mortgagee can advance these costs and add the amount to the mortgage debt.

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