What is a Mortgage?
A mortgage is a financial transaction that allows people to purchase real estate without paying the total price in one large payment. Instead, the purchaser agrees to pay a portion of the purchase price up front (called making a down payment), and borrows the remainder from a lender in exchange for a security interest in the property until the loan is repaid with interest or, in case of default, the property is taken by foreclosure. Mortgages are the dominant form of real estate financing worldwide. A key part of the mortgage process is the underwriting, during which the lender determines whether the borrower will be able to repay the loan and if the property will serve as adequate collateral for the mortgage. The underwriter will review factors such as the borrower’s credit score, debt-to-income ratio, down payment amount, assets, and appraisal value of the property. In addition, the underwriter may check to see if the title of the property is clear — that is, if there are no liens against it from creditors or other parties. The most common way to repay a mortgage is through an amortization schedule that breaks the loan down into a series of regular payments over a fixed period of time, with payments consisting of both principal and interest. The payments will be based on a number of different formulas depending on local laws and regulations, and may include factors such as: the compounding period; whether the loan is paid monthly, yearly, or semi-annually; the rate of interest; and the length of the loan term. As the borrower makes regular payments, they will build equity in the property over time. This is called homeownership, and it is a major benefit of mortgage loans. The homeowner is building a stake in the property, and will have a much more significant incentive to maintain it and protect it from damage or destruction, and to renovate it as necessary. While a mortgage is an incredibly important investment for most homeowners, it is also a substantial debt. This is why it’s so important to understand the different aspects of mortgages before you sign on the dotted line. The process of obtaining a mortgage is often lengthy and complex, and involves many factors that are subject to legal and regulatory restrictions. The most common requirements are a stable income source and a modest debt-to-income ratio. The lenders will also typically require that the borrower has a high enough credit score to qualify for a low interest rate, and may even run a credit report to verify that the information is accurate. In some jurisdictions, the mortgage may be insured with a private mortgage insurance provider, or “PMI”. This is an additional cost to the borrower and is intended to protect the lender in the event of a default.
Read More