Mortgages can be difficult and complicated to understand, especially when it comes to understanding the different types of loans you are taking and how they can affect you.
What Is a Mortgage?
A mortgage is a legal agreement by which a bank or other creditor, person giving money, lends money at interest in exchange for taking title of the debtor’s, person owing money, property, with the condition that the conveyance of title becomes void upon the payment of the debt. A mortgage normally follows a promissory note that carries with it a recourse or a non-recourse loan. For example, let’s say you buy a house in Coral Gables for $500,000. You put down a deposit of $200,000 and have to borrow a loan for $300,000. Let’s say that you also own a carpenter business in Miami Lakes. If you put your business’ assets as collateral for your loan, that is an example of a mortgage.
What Is a Promissory Note?
A promissory note is a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand. For example, using the above scenario, after you sign the mortgage for your new house, you will have to sign a promissory note, where you will be promising to pay back the lender of the loan. Payments can be annual, periodically, or even monthly. Under a promissory note, if you fail to pay, or default, the lender can seek to take legal action against you by not only seeking to foreclose your house, but also seeking to take legal action against your business, which you put as collateral. While people normally put their homes as collateral, other individuals may include other pieces of property or businesses as extra collateral in order to secure higher loans.
What Is a Recourse Loan?
A recourse loan allows a lender to pursue additional assets when a borrower defaults on a loan if the debt’s balance surpasses the collateral’s value. Recourse loans normally have a lower interest rate. If the borrower fails to pay and defaults on the payment schedule, the lender will first seize and sell the collateral specified in the loan. If that is not enough to repay the loan amount, the lender can go after the borrower’s other assets or sue to have the borrower’s wages garnished. This is the same scenario used above under promissory notes; if the borrower defaults, not only could the lender go after your home, but he or she could also go after anything else the borrower put as collateral.
What Is a Non-Recourse Loan?
A non-recourse loan permits the lender to seize only the collateral specified in the loan agreement, even if its value does not cover the entire debt. With non-recourse loans, lenders can collect the collateral but may not go after the borrower’s other assets. With non-recourse loans, you normally see high interest rates and high credit scores from the borrower. For example, let’s say that you put your Miami Lakes business as collateral in the mortgage alongside your house. If you default, the lender can only go after those two pieces of collateral; he or she cannot, unlike with recourse loans, go after other of your assets such as your wages.