A mortgage loan or simply mortgage is a loan used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged.
Last Updated Date: May 17, 2022
A mortgage is a loan that the borrower uses to purchase or maintain a home or other form of real estate and agrees to pay back over time, typically in a series of regular payments. The property serves as collateral to secure the loan. Mortgages are loans that are used to buy homes and another real estate. The property itself serves as collateral for the loan Mortgages are available in a variety of types, including fixed-rate and adjustable-rate. The cost of a mortgage will depend on the type of loan, the term (such as 30 years), and the interest rate the lender charges. A mortgage loan is a type of secured loan where you can avail funds by providing your asset as collateral to the lender. A mortgage is usually a loan sanctioned against an immovable asset like a house or a commercial property. The lender keeps the asset as collateral until the borrower repays the total loan amount.
Individuals and businesses use mortgages to buy real estate without paying the entire purchase price upfront. Over a specified number of years, the borrower repays the loan, plus interest, until they own the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the lender can foreclose on the property. For example, in a residential mortgage, a homebuyer pledges their house to the bank or other lender, which then has a claim on the property should the buyer default on paying the mortgage. In the case of a foreclosure, the lender may evict the home's residents and sell the property, using the money from the sale to pay off the mortgage debt. There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments.
The two most common types of mortgages are fixed-rate and adjustable-rate (also known as variable rate) mortgages.
Fixed-rate mortgages provide borrowers with an established interest rate over a set term of typically 15, 20, or 30 years. With a fixed interest rate, the shorter the term over which the borrower pays, the higher the monthly payment. Conversely, the longer the borrower takes to pay, the smaller the monthly repayment amount. However, the longer it takes to repay the loan, the more the borrower ultimately pays interest charges. The greatest advantage of a fixed-rate mortgage is that the borrower can count on their monthly mortgage payments being the same every month throughout the life of their mortgage, making it easier to set household budgets and avoid any unexpected additional charges from one month to the next. Even if market rates increase significantly, the borrower doesn’t have to make higher monthly payments.
Adjustable-rate mortgages (ARMs) come with interest rates that can usually, change over the life of the loan. Increases in market rates and other factors cause interest rates to fluctuate, which changes the amount of interest the borrower must pay, and, therefore, changes the total monthly payment due. With adjustable-rate mortgages, the interest rate is set to be reviewed and adjusted at specific times. For example, the rate may be adjusted once a year or once every six months. While ARMs make it more difficult for the borrower to gauge spending and establish their monthly budgets, they are popular because they typically come with lower starting interest rates than fixed-rate mortgages. Borrowers, assuming their income will grow over time, may seek an ARM in order to lock in a low fixed rate in the beginning, when they are earning less. The primary risk with an ARM is that interest rates may increase significantly over the life of the loan, to a point where the mortgage payments become so high that they are difficult for the borrower to meet. Significant rate increases may even lead to default and the borrower losing the home through foreclosure.
Mortgages are major financial commitments, locking borrowers into decades of payments that must be made on a consistent basis. However, most people believe that the long-term benefits of homeownership make committing to a mortgage worthwhile.
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