A mortgage is a type of loan that is used to purchase or maintain a home, land, or other type 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, and the outstanding amount on the loan is essentially the principal balance, which decreases over time as monthly payments are made. Unlike credit cards or personal loans, mortgages are insured against the property being purchased. This means that if the borrower doesn't repay the loan, the lender or financial institution can recover the property.
In simpler 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, for a set period of time. If you don't repay the loan, the lender can keep your home through a legal process known as foreclosure. The initial interest rate is usually lower than the market rate, which can make the mortgage more affordable in the short term, but possibly less affordable in the long term if the rate increases substantially. Mortgages are generally structured as long-term loans, whose periodic payments are similar to an annuity and are calculated according to time value of money formulas. There are different types of mortgages available, so eligibility requirements, loan limits, and even the types of properties eligible for financing will depend on the type of loan in question.
The money you pay in interest goes directly to your mortgage provider, who passes it on to your loan investors. The Financial Services Authority's recent guidelines for UK lenders regarding interest-only mortgages have tightened the criteria for new interest-only lending. A fixed-rate mortgage offers an interest rate that will never change for the life of the loan. If you're looking for a mortgage, an online mortgage calculator can help you compare estimated monthly payments, based on the type of mortgage, interest rate, and down payment amount you plan to make. Some lenders and third parties offer a biweekly mortgage repayment program designed to speed up loan repayment. In virtually all jurisdictions, specific procedures apply for foreclosure and the sale of mortgaged property, and may be strictly regulated by the appropriate government.
It's harder to qualify for a mortgage now than during the housing boom when almost any motivated homebuyer could find credit, even many who couldn't afford to buy a home. There are some cases where it makes sense to have a mortgage on your home even if you have enough money to pay it off. Sometimes due to a negative credit history or lack of credit history, a lender may ask a prospective borrower to look for a mortgage cosigner. Like other loans, mortgages have an interest rate - either fixed or adjustable - and a loan duration or term ranging from five to 30 years. If you sell your home before the mortgage term ends, the proceeds from the sale will be used to pay off any remaining mortgage debt.