What Is a Mortgage?
Mortgage is the loan that allows people to purchase a home. The mortgage loan has a term, usually between eight and 30 years, and it’s repaid in monthly installments that include interest and principal payments (although some lenders offer an option for an interest-only payment). Mortgages are the largest financial commitment most people ever make, so it’s important to understand how they work before jumping into one.
To get a mortgage, you’ll generally need to prove that you can afford the monthly payments by providing documentation that includes your income and assets. Typically, you’ll need to provide pay stubs and tax returns as well as bank statements and investment accounts. In addition, you’ll likely be subject to a credit check.
Many new homeowners start their mortgage journey by getting prequalified for a loan, which is an informal process that gives the lender an idea of what they might be able to borrow. However, this doesn’t necessarily mean they’ll be approved for a mortgage. A formal application with the lender of their choice is generally required, and it will involve providing additional documents as well as a home inspection and appraisal.
A mortgage is a lien attached to your property, and it gives the lender rights to take possession of your house if you fail to repay the debt. The lender is protected because the value of your home is often greater than the amount you still owe on your mortgage.
Most people don’t have enough money saved to pay for a home outright, and mortgages allow them to buy homes more quickly by borrowing the full purchase price of the home from a lender. In exchange for the financing, you pledge your home as collateral on the loan. If you don’t make your payments, the lender can take possession of your home and sell it to recoup their losses.
Mortgages come in a wide variety of shapes and sizes, with different terms, interest rates and down payment requirements. Some mortgages are used to buy second homes or vacation properties. Others are used to finance investment property such as rental homes or commercial buildings. In some cases, the loan can be refinanced or paid off at any time.
A mortgage is the most common type of long-term financing for the purchase of real estate. It’s also the most popular type of financing for new construction, since it’s often cheaper than buying a completed property and allows builders to meet demand by building homes more quickly.