What is a Mortgage?
Mortgage is a type of loan used to purchase a home or to borrow against the value of a home you already own. A mortgage is secured by a lien on real property that gives the lender the right to repossess or foreclose on the property in case of default.
A mortgage is a contract between a homeowner and a financial institution, usually a bank, that gives the lender the right to take ownership of the property if the borrower fails to repay the loan plus interest. In most cases, the borrower must also pay for insurance on the property, which can increase the monthly payment. Mortgages can be made to secure any type of real property, but they are most commonly used to finance the purchase of a dwelling (a house).
In Anglo-American law, the term mortgage is generally understood as a legal agreement by which an owner of a fee simple interest in land pledges that interest as collateral for a debt, and grants a security interest in the property to the creditor in exchange for the proceeds of the loan. The pledge is enforceable against third parties by a statutory power of sale.
When obtaining a mortgage, the lender will typically require proof of income and assets to ensure that the debt can be paid off from current or future earnings. They will also review the borrower’s credit report to make sure there are no issues that could impact their ability to pay. The credit score is particularly important because lenders use it to determine the size of the mortgage that will be offered, as well as the interest rate.
Most mortgages are amortizing loans, which means the amount owed will decrease over time as payments are applied to both principal and interest. In most cases, the lender will provide an amortization schedule that shows how much of each payment goes toward principal and how much toward interest.
Borrowers should consider carefully whether they can afford a mortgage, and should focus on getting the lowest possible interest rate while still allowing them to qualify for the amount of housing they can comfortably afford. This should include an analysis of other competing priorities and their potential impact on the cost of the mortgage.
In the United States, there are many options for obtaining a mortgage. These include a traditional bank, credit union, mortgage-specific lender, online-only lender, or mortgage broker. Borrowers should always compare rates across these different types to find the best deal.
Once the application is complete, the lender will review it to see if the borrower has enough income and assets to afford the mortgage and to verify the property’s value. They may also order an appraisal of the property to make sure that it is worth what is financed. The process can be lengthy and stressful, but borrowers should remember that they have the right to walk away from the mortgage at any point before closing.