Mortgage
Definition
A mortgage is a type of loan specifically used to purchase real estate, secured by the property itself.
Detailed Explanation
A mortgage is a loan arrangement in which a borrower obtains funds from a bank or other lender to buy property and agrees to pay back the loan over a specified period, typically 15 to 30 years, along with interest. The property serves as collateral for the loan, which means that the lender has the right to seize and sell the property if the borrower fails to make payments according to the terms of the mortgage agreement.
Mortgages are primarily used by individuals and businesses to buy homes and commercial real estate without paying the full price upfront. A mortgage can have a fixed interest rate, where it remains the same throughout the term of the loan, or variable, where it changes in accordance with fluctuations in market interest rates.
Additional costs associated with obtaining a mortgage include application fees, closing costs, and possibly private mortgage insurance (PMI) if the down payment is less than 20% of the property’s value. Mortgages are a critical component of the real estate market, enabling the ownership of property which otherwise would be unaffordable for most people.
Example
John and Mary decide to buy a first home. The house they have their eye on is priced at $300,000. They apply for a mortgage and make a 20% down payment of $60,000. They secure a 30-year fixed-rate mortgage for the remaining amount of $240,000 at an interest rate of 4% annually.
Key Articles Related To Mortgages
Related Terms
Amortization: refers to the process of paying off a debt, such as a mortgage, over a specific period of time through regular payments.
Collateral: Property or other assets that a borrower offers to a lender as security for a loan.
Down Payment: An initial payment made when something is bought on credit, particularly in real estate transactions.
Interest Rate: The cost of borrowing money, typically expressed as a percentage of the principal loan amount per annum.
FAQs
What factors affect mortgage eligibility?
Lenders consider several factors including credit score, income, debt-to-income ratio, employment history, and the amount of the down payment when determining mortgage eligibility.
Can I refinance my mortgage?
Yes, homeowners can refinance their mortgage to obtain a lower interest rate, reduce monthly payments, or change the loan term.
What happens if I default on my mortgage?
Defaulting on a mortgage can lead to foreclosure, where the lender takes possession of the property and sells it to recover the unpaid loan amount.
Editor: Colin Graves