A mortgage refers to the security on a loan, in almost all cases a loan to buy real estate. Basically, the bank buys the piece of real estate and the buyer pays the sum off gradually over many years with a certain amount of interest accruing to the principle. In addition, a down payment of a certain percentage of the total price of the property is paid at the time of the real estate transaction.
The main function of the mortgage is to provide security to the lender, usually a bank or another large financial institution. Since, in order to buy a home, a very large sum of money is involved, to finance the purchase of a property, a mortgage lender will need some type of security for the loan. A mortgage accomplishes this security in the form of a contract that legally requires the home buyer to pay back the lender until the term of the mortgage has ended. If the buyer discontinues paying off the principle as well as the agreed upon interest rate of the mortgage loan, the bank can take possession of the property and sell it to recover the outstanding debt through the process of foreclosure. The bank loans the money secured against the title to the property and the legal obligations of the borrowing home buyer. If the home buyer makes the required payments he or she maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.
Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms. This is a common process for home owners who want or need to alter their monthly mortgage payments. Refinancing can alter the interest costs of the mortgage and even the term of the mortgage. By the right combination of these two factors, monthly payments can be reduced. The effect is usually dependent of market forces. For instance, if you began a mortgage before interest rates dropped, then refinancing would allow you to start a new mortgage with a new rate. The ability of the home owner to refinance is usually dictated by the terms of the original mortgage agreement. Most fixed-term mortgages contain penalties for an early payment of the loan, and often include closing or transaction fees associated with refinancing a mortgage as well. Often, these penalties outweigh any savings generated through refinancing the mortgage in the first place.
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