What is a Mortgage?
A Mortgage is a financial agreement that allows individuals to purchase homes, land or other types of real estate without having to pay the entire purchase price upfront. Essentially, the borrower pledges his or her property as collateral for the loan, and pays monthly payments over a period of years (or sometimes as one lump sum at the end of the term) consisting of both principal and interest.
Individuals can obtain mortgage loans by applying with a lender and meeting specific requirements, such as having a high enough credit score or putting down a sizable down payment. Once approved, a homebuyer will begin the process of reviewing and agreeing to the terms of the loan and paying any fees required for mortgage processing. During this stage, an underwriter will also review the borrower’s financial situation and make sure that he or she can afford to repay the mortgage without having to default.
Mortgage lenders will typically have a standard form of mortgage that they offer to potential borrowers, but the exact terms may vary from country to country depending on local laws and prevailing culture. For example, a typical mortgage in the United States requires the borrower to make a down payment of at least 20% of the total value of the property. This requirement is intended to protect the lender in the event of a default and ensures that the borrower is capable of affording the mortgage debt.
Borrowers are also usually required to take out homeowners insurance for their mortgage, which is a type of protection policy that covers the cost of the property in the event of an accident or natural disaster. Generally, this is included in the overall monthly mortgage payment and is paid into an account called an escrow. The money in this account is then used to pay for the homeowner’s insurance premiums when they come due.
Another important aspect of a mortgage is the fact that the lender has a right to repossess or foreclose on the property if the borrower defaults on the loan. This right is known as the “security interest” and, under most laws, takes priority over any other claims against the property from other creditors.
During the repayment process, each monthly payment is typically split between principal and interest, with the majority of the initial payments being interest only. Over time, the proportion of each monthly payment that goes toward paying off principal increases, until it is eventually paid in full at the end of the mortgage term. Most mortgages are fully amortizing, meaning that each month a certain portion of the total amount paid will go toward paying down the principle and the remainder will be paid in interest. Some mortgages may be prepaid in part or in whole at any point, though there are often penalties for doing so. In addition, some mortgages are backed by foreign currencies, which can cause issues when the domestic currency depreciates against the foreign currency.