What Is a Mortgage?
Mortgage is a type of loan that allows individuals to purchase real estate without having to pay the entire price in cash. Instead, a portion of the purchase price is paid up front and then the borrower pays back the lender’s money plus interest over a specified number of years, often 30. This enables a much broader group of citizens to own property than would otherwise be possible. In addition, the mortgage gives the lender a claim against the property in the event of default and a legal right to seize the property (foreclose) if necessary.
Depending on local laws and market practice, the specific terms of a mortgage may differ. Some examples are: the interest rate, the amount paid per period, the frequency of payments, whether or not the principal can be increased or decreased during the term of the loan, prepayment penalties, the type of security held against the mortgage, and other factors.
To get approved for a mortgage, a person must meet certain requirements such as having a minimum credit score and being able to afford the monthly payments. The borrower must also commit to a down payment, typically a percentage of the home’s value that is paid upfront and decreases what the borrower must pay on a monthly basis over time.
Once the mortgage is approved, the lender will prepare a legal document called a mortgage deed or certificate of title. The mortgage document will outline the loan’s terms and give the lender rights to take the property in the event of default. It will also provide a priority lien that gives the lender the right to be repaid before any other creditors are paid from the proceeds of a sale of the property.
A mortgage payment consists of four core components: principal, interest, taxes and insurance. These are often referred to as PITI, and they are the four primary components that are included in most loan quotes. In some cases, points may be included as well, although this is less common. Points are additional fees paid to the lender that can lower an interest rate.
In the case of a residential mortgage, most lenders will allow borrowers to choose between a fixed and adjustable-rate mortgage. A fixed-rate mortgage offers a stable monthly payment, while an adjustable-rate mortgage provides a higher initial interest rate but the monthly payments can change over the life of the loan.
In some countries, the practice of mortgages is regulated by law and/or government intervention, such as setting minimum standards for loan-to-value ratios, maximum debt-to-income ratios, and other features. Lenders will often sell mortgage loans to investors who want the income stream of payments from a secured property, in a process called securitization. The underlying assets are then traded on the financial markets. In many countries, lenders borrow funds to fund their mortgages from other sources, such as depositors or bondholders. This helps them manage the risks associated with lending against real estate, such as the risk that property values will decline.