What is a Mortgagee?

A mortgagee is kind of like a pawn shop . . .

You can borrow money from a pawn shop, in exchange for an item you provide as collateral. If you pay back what you owe on time, you can reclaim the item you pawned. But if you don’t, the pawn shop will sell it. Similarly, when you take out a home loan, a bank (the mortgagee) will lend you money, but your house serves as collateral. If you don’t pay off your loan in time, the mortgagee will likely sell your house.

In a real estate loan, where a loan is extended for the purpose of buying a home or other property, the lender is the mortgagee, and the borrower, or homebuyer, is the mortgagor.

But shouldn’t the person receiving the loan be called the mortgagee? If a mortgage were actually a loan, you’d be correct, but it isn’t — That’s a common misconception. Let’s clear that up, and you’ll see why the terms appear so topsy-turvy.

Most of the time, people can’t afford to buy a home with a single cash payment. And even if they could, it doesn’t always make sense financially. Instead, most homebuyers set up a home loan so that they can pay it off over time.

A mortgage is part of that process — But it isn’t actually the loan itself. When people talk about “mortgages,” they’re usually lumping together a home loan and a mortgage agreement, which are separate things.

The home loan is the transfer of funds itself, accompanied by a promissory note, which is a contract in which the the borrower agrees to pay back the amount borrowed plus an amount of interest that both parties agree on. Sometimes, the promissory note is called the mortgage note.

Typically, the buyer pays a down payment - often 20% of the home’s purchase price, though it can be less. The buyer then makes payments each month based on the unpaid loan amount and the underlying interest rate.

The lender needs collateral for the loan, and the mortgage is a contract that gives the lender the house that the borrower is buying as the collateral. Essentially, the bank owns the home until the loan is paid off. The homebuyer has the right to live in it, but the lender holds the title and the deed, which are transferred to the homebuyer once the loan is paid off.

The mortgage gives the lender “title rights,” which are essentially ownership rights. That means if a homebuyer doesn’t make their mortgage payments, the lender has the right to start foreclosure on the home, take it from the homebuyer, and sell it. That’s a means of protecting the lender and helping it to recoup its losses if the borrower can’t pay back the loan.

Some states do this a little differently. In those states, known as “lien theory” states, the borrower retains the title and deed to the property throughout the life of the loan, but the lender receives a lien that gives it the right to sell the property if the loan isn’t repaid in full. Sometimes a third party will hold the title for the duration of the loan, which in theory helps mediate disputes.

What all this means is that in a mortgage, as opposed to a home loan, the important thing that’s being transferred is the rights to the property, or power of sale. The entity that receives those rights (the lender) is the mortgagee. The borrower, the person granting those rights, is the mortgagor.

Yes. Anyone who lends you money to buy a home and enters into a mortgage contract with you can be a mortgagee. When you sign a mortgage contract with an individual, it’s called a private mortgage. That means the mortgage is entered into with a private lender, like a family member or a friend, as opposed to a bank or other institution.

Sometimes a private mortgage can be preferable because you can work out a deal in which you don’t have to pay interest or can pay special rates. This is more common when the lender is close to you.

A mortgagee clause is a section in a property insurance contract that establishes who the insurer will reimburse if the property is damaged or destroyed. This protects the mortgagee from losses that would prevent them from selling the property if the borrower were to default. Even if the house burned down, the mortgagee could still recoup the value of the property via reimbursement from the insurer.

In a mortgage loan, the mortgagor is the borrower, and the mortgagee is the lender. Although it seems counterintuitive, it’s important to remember that it has nothing to do with who receives the funds from a home loan. A mortgage is transferring the power of sale over the mortgaged property, and that goes to the lender/mortgagee.

There are three basic types of mortgages in the United States:

• Fixed-rate/conventional mortgage: This type of mortgage locks in the interest rate over the loan’s lifetime. Monthly mortgage payments will stay the same throughout the duration of the loan. A fixed-rate mortgage can last for 10 to 40 years, but 15- and 30-year mortgages are the most common.
• Adjustable-rate mortgage (ARM): Unlike a fixed-rate mortgage, an ARM typically does not keep a steady interest rate. These mortgages typically start out with lower rates and lower monthly payments, but since the mortgage rates aren’t fixed, the interest rate will fluctuate with changing market conditions. Typically, the interest rate is locked in for the first five years or so and then fluctuates after that.
• Interest-only mortgage: The borrower pays only the interest on the loan for the first five or 10 years. After that, they pay both interest and principal, as with a conventional mortgage.

Some buyers may be eligible for other types of home loans, such as:

• FHA loans: These loans are designed for low-to-moderate-income homebuyers, many of whom can’t qualify for traditional loans due to poor credit history. FHA loans require lower down payments, often just 3.5%, and are guaranteed by the Federal Housing Administration.
• VA loans: VA loans often do not require down payments and are only available to veterans. They’re guaranteed by the Department of Veterans Affairs.

A secured mortgage is “secured” because it’s backed by collateral, in this case the house that the funds from a home loan are going to purchase. If the borrower can’t pay back the loan, the lender has the right to seize and sell the house.

The documents associated with a mortgage contract make clear that a lender has that right, and they lay out the details of how a lender would seize the home if the borrower defaults. Typically, the lender is listed as the owner of the property on the property’s title, and a document known as a perfected lien is filed with the appropriate government agency, detailing and documenting the lender’s rights. If the borrower defaults, those protections clear the way for the lender to foreclose on and take possession of the property.