Final answer:
A legal or first mortgage historically involved a temporary transfer of property ownership to the lender, contrasting with modern practices where ownership is retained. Contemporary mortgages, often 15 or 30 years in term, are valued by banks based on their present worth, which can be realized in the secondary loan market. Whether it is more advantageous to be a borrower or lender depends on the relative rates of interest and inflation.
Step-by-step explanation:
Historical Concept of Legal Mortgages
The historical concept of a legal mortgage, or first mortgage, refers to an arrangement where the borrower would temporarily transfer ownership of the property to the lender as security for the loan. This practice is vastly different from contemporary mortgage practices where the borrower retains ownership while the property is simply collateral for the loan. In a historical mortgage, the ownership would revert back to the borrower upon full repayment of the loan, emphasizing the importance of the temporary ownership transfer in historical arrangements.
In contemporary practice, banks play a significant role in the mortgage process. Typically, mortgage terms span either 15 or 30 years. Banks measure the value of a mortgage loan as an asset by estimating its present value, which may include selling the loan in the secondary loan market to other institutions. This mechanism allows banks to free up capital and manage risk.
Assessing whether it's better to be a borrower or lender in any given year involves looking at the mortgage interest rates and inflation rates. Borrowers tend to benefit when inflation rates exceed interest rates, reducing the real cost of borrowing over time. Conversely, lenders benefit when interest rates are high relative to inflation, as the real value of the loan payments they receive is greater.