What Is a Mortgage?
A mortgage is a type of loan that allows an individual or company to buy real estate without paying the entire purchase price up front. The borrower usually makes payments on the loan over time, and eventually becomes the owner of the property free and clear. A mortgage is also referred to as a claim or lien against the property, and it can be seized through foreclosure if the borrower fails to make timely payments.
Most mortgages are secured by real property, but they may be backed by other assets such as savings and investments, or by income from an employment or self-employed business. A person or business who takes out a mortgage must pass certain credit checks and prove that they are financially able to meet the repayment obligations on their loan.
The modern Anglo-American mortgage is the descendant of a form of legal transaction that emerged in England in the Middle Ages. It involved the transfer of ownership of land, with the condition that it would revert to the debtor after a specified period of time if the debt was repaid. In addition, the debtor pledged their fee simple interest in the property to the creditor as security for the new obligation.
Getting a mortgage typically involves applying to several lenders, and providing evidence of your financial ability to repay the loan. This includes producing bank and investment statements, recent tax returns, and paycheck stubs. The lender will also conduct a credit check to ensure that the borrower does not have outstanding liens against other properties.
An experienced mortgage lender will be able to guide borrowers through the process of choosing the right mortgage for them. Borrowers can take advantage of a variety of loan products, including fixed and adjustable-rate mortgages, balloon mortgages, and jumbo loans.
It is generally best to apply for a mortgage through a lender that offers the most competitive terms, such as a bank or credit union. These lenders will review a borrower’s financial profile and assess the value of the property being purchased to determine an appropriate loan amount. They will also take into account the borrower’s debt-to-income ratio and other factors.
A mortgage can be applied for to finance both residential and commercial properties. However, the terms of a commercial mortgage are generally more restrictive than those for residential properties. In general, a mortgage on a commercial property is more likely to involve a fixed-rate rather than an adjustable-rate loan and a higher LTV (loan-to-value) ratio.
The typical mortgage payment is comprised of principal, interest, taxes and insurance, a combination known as PITI. When comparing different lenders’ terms, it is important to consider the total cost of the mortgage, which can be calculated by using an APR – or annual percentage rate – that includes fees and points. Ultimately, the most effective way to reduce mortgage costs is to pay down the principal as quickly as possible. A good place to start is by increasing your down payment, which will lower what you have to repay on a monthly basis.