Mortgage loans are made using a house or other real estate as collateral, often to purchase or make repairs to the real estate property itself. In certain cases, however, the individual taking out the mortgage doesn't own the land that the property stands on but is instead leasing it as part of a long-term lease agreement. In these instances, a leasehold mortgage is taken out instead of a standard mortgage.
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Leasehold mortgages are issued to commercial developers or other individuals who are building or repairing a structure that stands on leased property. The mortgage applies only to the actual structure that's owned by the developer or homeowner and makes no claim to the land the structure is on. Structures built with leasehold mortgages are often located in commercial locations and are designed to house one or more storefronts to take advantage of the location of the leased property.
Although a standard mortgage would be the primary lien on a property, a leasehold mortgage takes a secondary position to the interests of the property owner whose land was being leased. Any money due to the landowner must be paid before the bank or finance company who issued the lease is able to collect in the event of bankruptcy or other nonpayment. If the developer or individual who took out the leasehold mortgage defaults on his loan, the mortgage lender may auction off the mortgaged structure to cover its interest, as well as any money due to the owner of the leased land.
Leasehold mortgages are typically for longer periods of time than standard household mortgages, with the average leasehold mortgage lasting for 49 years. For larger construction projects such as mall development, leasehold mortgages may have a repayment period of up to 100 years, provided that the land lease allows for occupancy lasting that long. Interest rates vary depending on the amount being borrowed, the income potential of any commercial locations included in the construction or renovation, and the likelihood of the developer losing the lease before the loan is repaid.
Because of the risk for the lender that's associated with leasehold mortgages, lenders usually require proof of a long-term lease before issuing a mortgage for construction or renovation purposes. Leases that expire within 20 years of the mortgage application are typically considered unfit for lending because the landowner could choose not to renew the lease and the borrower would lose the income that pays for the mortgage payments. The longer a lease allows the borrower to retain control of the land, the more likely a lender is to offer her a leasehold mortgage.
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