Types of Mortgages (Part 1)
Mortgages can be classified by degree of priority, by method of repayment, financing requirement and whether insured or not. There are also blanket, package and open end mortgages as well as purchase money mortgages.
Degree of Priority: Any mortgage which is subordinate to a mortgage or mortgages on the same property is a junior mortgage. The degree of priority is usually indicated by referring to the instrument as a first, second, third, and in some cases fourth mortgage; but the public records must always be consulted to determine which claims against the property have precedence. Also, a junior mortgage may become a senior lien if prior claims are paid. Obviously, junior mortgages typically contain more risk than senior mortgages, and consequently they usually yield a higher rate of return and are not written for long periods.
There are cases where a deed in the form of an absolute conveyance is used to transfer the title to the property. It may contain no reference to any debt or condition, indicating that it is really given as security for a debt. Such a legal instrument may be a mortgage in legal effect if it is actually given for the purpose of securing a debt and if this fact can be proved in the courts.
Method of Repayment: Various methods of repayment may be provided in a mortgage agreement. If no payment on the principal are made during the term of the mortgage. It is called a straight term mortgage. If payment is made in accordance with a definite plan which requires the repayment of certain amounts at definite times so that all of the debt is retired by the end of the term, the mortgage is amortized. If parts of the debt are repaid during the term of the mortgage and parts remain to be paid when the debt falls due, it is called a partially amortized mortgage. Various combinations of straight term and amortized mortgages may be used; for example, a straight term mortgage may allow amortization in part or in entity according to the terms of the instrument; or an amortized mortgage may be converted in to a straight term agreement under certain conditions. In some cases mortgages “balloon out” with a big final payment at the end of the term. Frequently, the balloon mortgages are used with renewal options that provide refinancing of the final payment with conventional mortgages at current rates of interest. This arrangement helps the lender to adjust to interest rate risk.
