A mortgage is a type of loan used to buy or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, usually in a series of regular payments that are divided into principal and interest. The property then serves as collateral to secure the loan. The repayment of a mortgage includes the principal amount of the loan you borrowed and the interest earned.
A mortgage is paid off in a series of payments over the agreed loan term. In simple terms, a mortgage is a loan where your home works as collateral. The bank or mortgage lender lends you a large amount of money (usually 80 percent of the home price), which you must repay (with interest) over a specified period of time. If you can't repay the loan, the lender can keep your home through a legal process known as foreclosure.
In the case of a fixed-rate mortgage, the interest rate remains the same throughout the term of the loan, as do the borrower's monthly payments to pay off the mortgage. In the 1980s, adjustable rate mortgages (ARMs) appeared, loans with an even lower initial interest rate that are adjusted or “reset” each year during the life of the mortgage. However, keep in mind that a mortgage loan is a major debt that uses your property as collateral. An adjustable or variable rate mortgage (ARM) has an interest rate that fluctuates over the life of the loan depending on what interest rates are doing.
This means that the rate will not change for the entire term of the mortgage, usually 15 or 30 years, even if interest rates rise or fall in the future. You can get a mortgage through a credit union, a bank, a specialized mortgage lender, an online-only lender, or a mortgage broker. Once you feel like your credit rating is good enough, start thinking about the type of mortgage you're looking for. It will also include homeowners insurance, property taxes, and possibly mortgage insurance (depending on the loan program and down payment).
Probably one of the most confusing aspects of mortgages and other loans is the calculation of interest. The more you understand how a mortgage works, the better prepared you'll be to select the mortgage that's right for you. Now let's look at some of the less common mortgage options, such as government sponsored loans, global mortgages, and reverse mortgages. When comparing mortgage rates, make sure to compare rates with the same number of discount points for a real comparison.
Lenders usually give homebuyers a mortgage pre-approval letter once they have been pre-approved for the loan amount. Many homeowners had financial problems with these types of mortgages during the housing bubble of the early 2000s. The down payment on a mortgage is the lump sum you pay in advance that reduces the amount of money you have to borrow. The amount you'll have to pay for a mortgage depends on the type of mortgage (for example, fixed or adjustable), its term (for example, 20 or 30 years), the discount points you pay, and the interest rates that apply at any given time.