Before you agree to take on a mortgage loan, make it a point to learn everything possible about this type of lending agreement – that includes the basics. One simple term you should understand that you may hear frequently during the process of applying for and closing a loan is mortgage value. This term refers to how much the mortgage on the home is worth.
Often equal to the mortgage balance, the mortgage value is how much the home mortgage is worth. Note that it might differ from the current market value of the property.
Understanding Mortgage Basics
A mortgage is a lien placed on real property. It gives the lienholder the right to take possession of the home in case he doesn't receive payments as agreed. Some people think a mortgage is the loan itself – but that's not true. It is a party's right to claim the home that is under consideration for the loan under certain conditions.
What Is the Mortgage Value?
As the name suggests, the mortgage value is the worth of the mortgage on the home. It is commonly equivalent to the mortgage balance. The value of the mortgage may not be equivalent to the current market price of the property over time.
For instance, say a home's value plummets due to a bad real-estate market. The value of the mortgage does not plummet at the same rate as the market value.
The Home Appraisal
An appraisal is the primary tool that a mortgage company uses to determine the value of the home (as well as the mortgage) before approving a home loan. The appraisal is performed by a licensed professional who has training and experience in the valuation of property in that particular area. The appraiser may have advanced knowledge of the neighborhood, past home sales, valuable home features and future developments coming in the area that could affect the value of the asset.
"Underwater" vs Profitable
In the situation where the home price sinks below the mortgage value, the house is said to be "underwater." If the homeowner attempts to sell at the going rate for the home, he'd still be indebted to the lender company for the remaining value of the mortgage. Some people who find themselves in these situations decide to ask the lender to do a short sale, where the bank agrees to allow a sale that's lower than the mortgage value and often bills the initial borrower the difference.
On the other, more positive, hand if the home rises in value over time, the difference between the market value and the mortgage value is the homeowner's equity (expected profit) if he were to sell the home to a willing buyer.