Going through the loan approval process can be confusing for anyone, especially a first-time home buyer. There are many questions that must be answered for the average person to have a firm grasp of the process. Today we will discuss the difference between a mortgage loan and a mortgage agreement.
What is a mortgage loan?
Put simply, a mortgage loan is a loan given to a homeowner by a bank or lender. It is used to finance the purchase of a home. The home that is purchased acts as collateral in exchange for the loan. This protects the lending institution in the event that the loan is not paid back, as it will then retain ownership of the property.
When a mortgage loan is taken out by a homeowner, they generally pay a single payment each month that includes:
- Principal payment. The principal is the amount borrowed for the home. For example, if a person takes out a $500,000 loan then their beginning principal will be $500,000. As they continue to make payments on time, their principal will go down accordingly.
- Interest payment. The lender makes money by charging interest on the loaned principal.
- Mortgage insurance. In most cases this will include homeowner’s insurance and it may also include private mortgage insurance (PMI), which is issued to your lender to cover their loan in the event that you do not pay the money back. PMI is generally required when a buyer’s down payment is less than 20% of the value of the home.
What is a mortgage agreement?
A mortgage agreement is the contract in which the borrower promises that they will relinquish their claim to the property if they are unable to pay their loan. The mortgage agreement is not actually a loan – it is a lien on the property. It means that if the buyer defaults on the loan, they give the lender permission to foreclose on the property.
What is the difference between the two?
A mortgage loan is the contract in which a buyer and lender set out the terms of a mortgage, including the payment amounts, interest rates and any other terms of the agreement. A mortgage agreement is an unrelated document that gives the bank the right to foreclose on the property if the buyer does not make the agreed upon payments.
Additionally, if a buyer chooses to refinance a mortgage or take out another mortgage on the same property, the buyer will receive separate documents for each mortgage loan. Mortgage agreements, on the other hand, are cumulative documents, meaning that each new loan will be tied into the existing agreement. As a result, a mortgage agreement will reflect the entire loan amount connected to a property, as shown in the example below. Mortgage agreements can be especially useful for investors, as they will show the entire lien tied to a property, without having to research each mortgage separately.
PropertyShark provides a one-stop shop for all title documents, including mortgage loans and mortgage agreements for each property across a large portion of New York State, California and New Jersey State counties, including reports for every property in NYC. Make sure to check out our open sample property report here.