A mortgage loan, or simply mortgage, is used either by purchasers of real property to raise funds to buy

real estate, or alternatively by existing property owners to raise funds for any purpose, while putting a
lien on the property being mortgaged. The loan is "secured" on the borrower's property through a
process known as mortgage origination. This means that a legal mechanism is put into place which
allows the lender to take possession and sell the secured property ("foreclosure" or "repossession") to
pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms.
The word mortgage is derived from a "Law French" term used by English lawyers in the Middle Ages
meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or
the property is taken through foreclosure.[1] A mortgage can also be described as "a borrower giving
consideration in the form of a collateral for a benefit (loan)".

Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging
commercial property (for example, their own business premises, residential property let to tenants, or
an investment portfolio). The lender will typically be a financial institution, such as a bank, credit union
or building society, depending on the country concerned, and the loan arrangements can be made
either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the
loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can
vary considerably. The lender's rights over the secured property take priority over the borrower's other
creditors, which means that if the borrower becomes bankrupt or insolvent, the other creditors will only
be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in
full first.

In many jurisdictions, it is normal for home purchases to be funded by a mortgage loan. Few individuals
have enough savings or liquid funds to enable them to purchase property outright. In countries where
the demand for home ownership is highest, strong domestic markets for mortgages have developed.
Mortgages can either be funded through the banking sector (that is, through short-term deposits) or
through the capital markets through a process called "securitization", which converts pools of
mortgages into fungible bonds that can be sold to investors in small denominations.[2]

 Property: the physical residence being financed. The exact form of ownership will vary from
country to country, and may restrict the types of lending that are possible.

 Mortgage: the security interest of the lender in the property, which may entail restrictions on
the use or disposal of the property. Restrictions may include requirements to purchase home
insurance and mortgage insurance, or pay off outstanding debt before selling the property.

 Borrower: the person borrowing who either has or is creating an ownership interest in the
property.
  Lender: any lender, but usually a bank or other financial institution. (In some countries,
particularly the United States, Lenders may also be investors who own an interest in the
mortgage through a mortgage-backed security. In such a situation, the initial lender is known as
the mortgage originator, which then packages and sells the loan to investors. The payments
from the borrower are thereafter collected by a loan servicer.[3])

 Principal: the original size of the loan, which may or may not include certain other costs; as any
principal is repaid, the principal will go down in size.

 Interest: a financial charge for use of the lender's money.

 Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize
the property under certain circumstances is essential to a mortgage loan; without this aspect,
the loan is arguably no different from any other type of loan.

 Completion: legal completion of the mortgage deed, and hence the start of the mortgage.

 Redemption: final repayment of the amount outstanding, which may be a "natural redemption"
at the end of the scheduled term or a lump sum redemption, typically when the borrower
decides to sell the property. A closed mortgage account is said to be "redeemed".

1. Conventional vs. adjustable rate mortgage

 Conventional or fixed-rate mortgage - Loan rate does not fluctuate with interest
rate changes. Tends to feature higher rates than adjustable-rate mortgages. 30-
and 15-year terms most common.
 Adjustable-rate mortgage (ARM)
o Allows adjustments of the loan interest rate at pre-specified regular
intervals. Also known as a "variable-rate mortgage" or a "floating-rate
mortgage".
o Components of an adjustable-rate mortgage:
 Initial rate - the initial rate charged on an ARM for a specified
period, anywhere from three months to 10 years. The shorter the
period, the lower the initial rate.
 Interest rate index - An index used to calculate rate on ARMs that is
independent of the lender. As the index falls or rises, the ARM does
the same. Some common indexes include the rates for 6- or 12-
month U.S. Treasury securities or the Prime Rate.
 Margin - The number of percentage points added to an index rate
to determine the current ARM rate.
+ margin

For example, if the index rate is 5% and the margin is 2%, then the ARM rate is 7%.

 Adjustment interval - How often the ARM rate will be reset. One-
year adjustment interval is most common.
 Rate cap - Limits how much an ARM rate can change. Periodic
cap limits how much a rate can change at a given adjustment
interval. Lifetime cap limits the total rate adjustment during the life
of a loan.
 Payment cap - Sets a dollar limit on how much a monthly payment
can increase. This limits the change in monthly mortgage payment,
but it does not limit the interest rate being charged. When rates are
rising, less of payment goes toward principal and more toward
interest.
 Negative amortization - A situation in which monthly payments are
not enough to cover interest due on the loan. Unpaid interest then
is added to loan balance, meaning borrower's balance grows each
month rather than decline.

2. Home equity loan and line of credit

 Home equity loan

o A consumer loan secured by a second mortgage, allowing home owners
to borrow against their equity in the home. The loan is based on the
difference between the homeowner's equity and the home's current
market value.
o Limit on deductibility of home equity debt: $100,000 for loan not
associated with purchase, construction or improvement of the home.
($50,000 for married filing separate). Interest on loan amounts above the
limit are treated as nondeductible personal interest.
 Also known as "equity loan" or "second mortgage".
 Home equity line of credit (HELOC)
o A line of credit extended to a homeowner that uses the borrower's home
as collateral. Once a maximum loan balance is established, the
homeowner may draw on the line of credit at his or her discretion. Interest
 is charged on a predetermined variable rate, which is usually based on
prevailing prime rates.
 Once there is a balance owing on the loan, the homeowner can
choose the repayment schedule as long as minimum interest
payments are made monthly. The term of a HELOC can last
anywhere from less than five years to more than 20 years, at the
end of which all balances must be paid in full.
 $100,000 deductibility applies.

3. Refinancing cost-benefit analysis

 Monthly benefits from refinancing

o Current monthly mortgage payment
o - Mortgage payment after refinancing
Monthly savings
o - Income tax on monthly savings
After-tax monthly savings
 Cost of refinancing
o Total after-tax closing costs
 Number of months needed to break even
o Total after-tax closing costs / After-tax monthly savings

4. Reverse mortgage
A special type of loan used to convert the equity in a home into cash. The money
obtained through a reverse mortgage is usually used to provide seniors with cash flow
in their retirement years.

The reverse mortgage is aptly named because the payment stream is reversed. Instead
of the borrower making monthly payments to a lender, as with a regular mortgage, a
lender makes payments to the borrower. While a reverse mortgage loan is outstanding,
the borrower owns the home and holds title to it, without having to make any monthly
mortgage payments.
 Sources of Finance
Table of Contents [hide]
 1 Long-Term Sources of Finance
 2 Medium Term Sources of Finance
 3 Short Term Sources of Finance
 4 Owned Capital
 5 Borrowed Capital
 6 Internal Sources
 7 External Sources

Sources of finance are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of
credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are
classified based on time period, ownership and control, and their source of generation. It is ideal to evaluate
each source of capital before opting it.

Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a
new business. It is perhaps the toughest part of all the efforts. There are various sources of capital, we
can classify on the basis of the time period, ownership and control, and source of generation of finance.

Having known that there are many alternatives to finance or capital, a company can choose from.
Choosing right source and the right mix of finance is a key challenge for every finance manager. The
process of selecting right source of finance involves in-depth analysis of each and every source of fund.
For analyzing and comparing the sources, it needs the understanding of all the characteristics of the
financing sources. There are many characteristics on the basis of which sources of finance are classified.

On the basis of a time period, sources are classified as long-term, medium term, and short term.
Ownership and control classify sources of finance into owned capital and borrowed capital. Internal
sources and external sources are the two sources of generation of capital. All the sources of capital have
different characteristics to suit different types of requirements. Let’s understand them in a little depth.

Long-Term Sources of Finance

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or
maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery,
land and building etc of a business are funded using long-term sources of finance. Part of working capital
which permanently stays with the business is also financed with long-term sources of funds. Long-term
financing sources can be in form of any of them:

 Share Capital or Equity Shares

 Preference Capital or Preference Shares

 Retained Earnings or Internal Accruals

 Debenture / Bonds

 Term Loans from Financial Institutes, Government, and Commercial Banks

  Venture Funding

 Asset Securitization

 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.

CFOs of companies are required to have FINANCIAL MODELING SKILLS to present to the institutions,
banks, or any form of investors about the viability of their project and safety of their money along with
the assurance about the good returns. Good Certified Financial Modellers have always been in great
demand. It is a very promising career choice. We suggest the extensive Financial Modelling Course by
Corporate Finance Institute.

Short Term Sources of Finance

The right need assessment is a must before jumping to any of the choices mentioned above. There are
forecasting experts who assess the need and prepares a financial model in MS Excel explaining their
precise need. This is then presented to the lenders for their satisfaction. You can learn how to forecast
working capital also.

Short term financing means financing for a period of less than 1 year. The need for short-term finance
arises to finance the current assets of a business like an inventory of raw material and finished goods,
debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital
financing. Short term finances are available in the form of:

 Trade Credit

 Short Term Loans like Working Capital Loans from Commercial Banks

 Fixed Deposits for a period of 1 year or less

 Advances received from customers

 Creditors

 Payables

 Factoring Services

 Bill Discounting etc.

Working capital management refers to a company's managerial accounting strategy designed to
monitor and utilize the two components of working capital, current assets and current liabilities, to
ensure the most financially efficient operation of the company. The primary purpose of working capital
management is to make sure the company always maintains sufficient cash flow to meet its short-term
operating costs and short-term debt obligations.

Working capital management commonly involves monitoring cash flow, assets and liabilities
through ratio analysis of key elements of operating expenses, including the working capital ratio,
collection ratio and the inventory turnover ratio. Efficient working capital management helps with a
company's smooth financial operation, and can also help to improve the company's earnings and
profitability. Management of working capital includes inventory management and management of
accounts receivables and accounts payables.