Mortgage what is

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The information on this site does not modify any insurance policy terms in any way. A mortgage is a loan from a bank or other financial institution that helps a borrower purchase a home.

The collateral for the mortgage is the home itself. A mortgage loan is typically a long-term debt taken out for 30, 20 or 15 years. Over time, more of your payment will go toward the principal. If you default on your mortgage loan, the lender can reclaim your property through the process of foreclosure.

The principal is the specific amount of money you borrowed from a mortgage lender to purchase a home. The interest , expressed as a percentage rate, is what the lender charges you to borrow that money.

In other words, the interest is the annual cost you pay for borrowing the principal. There are other fees involved in getting a mortgage besides interest, including points and other closing costs. Your lender typically collects the property taxes associated with the home as part of your monthly mortgage payment. The money is usually held in an escrow account , which the lender will use to pay your property tax bill when the taxes are due.

Homeowners insurance provides you and your lender a level of protection in the event of a disaster, fire or other accident that impacts your property. Your lender collects the insurance premiums as part of your monthly mortgage bill, places the money in escrow and makes the payments to the insurance provider for you when the premiums are due. Your monthly mortgage payment might also include a fee for private mortgage insurance PMI.

A mortgage is essentially a lien , or claim, on the title to your home, explains David Carey, vice president and residential lending manager at Tompkins Mahopac Bank in Brewster, New York. In some states, a deed of trust represents that security instrument, instead of the mortgage. Another key point: While a mortgage is secured by real property in other words, your home , other types of loans, such as credit cards, are unsecured, says Jodi Hall, president of Nationwide Mortgage Bankers, Inc.

There are several types of mortgages available to borrowers, including conforming and non-conforming loans; conventional fixed-rate mortgages, which are among the most common; adjustable-rate mortgages ARMs ; balloon mortgages; FHA, VA and USDA loans; jumbo loans; and reverse mortgages. With a fixed-rate mortgage , the interest rate is agreed upon before you close the loan, and stays the same for the entire term, which generally ranges up to 30 years.

Paying the loan off over a longer period makes the monthly payment more affordable. No matter which term you prefer, the interest rate will not change for the life of the mortgage. Those costs will add to your monthly mortgage payment. The price of a home is often far greater than the amount of money most households save. The loan is then secured by the value of the property in case the borrower defaults.

Mortgage lenders will need to approve prospective borrowers through an application and underwriting process. Home loans are only provided to those who have sufficient assets and income relative to their debts to practically carry the value of a home over time. A person's credit score is also evaluated when making the decision to extend a mortgage. The interest rate on the mortgage also varies, with riskier borrowers receiving higher interest rates.

Many mortgages carry a fixed interest rate. This means the rate will not change for the entire term of the mortgage typically 15 or 30 years even if interest rates rise or fall in the future. A variable or adjustable-rate mortgage ARM has an interest rate that fluctuates over the loan's life based on what interest rates are doing.

Lenders generally issue a first or primary mortgage before they allow for a second mortgage. This additional mortgage is commonly known as a home equity loan. Most lenders don't provide for a subsequent mortgage backed by the same property. Mortgages are offered by a variety of sources.

Banks and credit unions often provide home loans. There are also specialized mortgage companies that only deal specifically with home loans. You may also employ an unaffiliated mortgage broker to help you shop around for the best rate among different lenders. Accessed Aug. Department of Housing and Urban Development.

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The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The money you borrow is called the capital and the lender then charges you interest on it till it is repaid.

The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital. At the end of the term, typically 25 years, you should manage to have paid it all off and own your home. With interest-only mortgages, you pay only the interest on the loan and nothing off the capital the amount you borrowed. These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it.

You will have to have a separate plan for how you will repay the original loan at the end of the mortgage term. You can ask your lender if you can combine both options, splitting your mortgage loan between a repayment and interest-only mortgage. With a fixed-rate mortgage your repayments will be the same for a certain period of time — typically two to five years.

If you have a variable rate mortgage, the rate you pay could move up or down, in line with the Bank of England base rate. This article is provided by the Money Advice Service. We will not reply to your feedback. Don't include any personal or financial information, for example National Insurance, credit card numbers, or phone numbers.

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