What is mortgage?
A mortgage is a type of loan used to purchase or maintain a home, land or other type of real estate. The borrower agrees to make periodic payments to the lender, usually in a series of regular payments that are divided into principal and interest. The property then acts as collateral to secure the loan.
Borrowers must apply for a mortgage through their preferred lender and ensure they meet a number of requirements, including a minimum credit score and down payment. Mortgage applications go through a rigorous underwriting process before reaching the final stage. Types of mortgages vary according to the needs of the borrower, such as conventional and fixed loans.
How Mortgages Work
Individuals and businesses use mortgages to buy real estate without paying the entire purchase price up front. The borrower repays the loan plus interest over a specified number of years until they own the property free and clear. Most traditional mortgages are fully-amortizing. This means that the regular payment amount will stay the same, but different proportions of principal vs. interest will be paid over the life of the loan with each payment. Typical mortgage terms are for 30 or 15 years.
For example, a residential home buyer mortgages their home to their lender, who then makes a lien on the property. This ensures that the lender’s interest in the property is protected if the buyer defaults on its financial obligations. In the case of foreclosure, the lender can evict the occupants, sell the property, and use the proceeds from the sale to pay off the mortgage loan.
Prospective borrowers begin the process by applying to one or more mortgage lenders. The lender will ask for proof that the borrower is able to repay the loan. This may include bank and investment statements, recent tax returns and proof of current employment. Lenders will usually run a credit check as well.
If the application is approved, the lender will offer the borrower a loan up to a specified amount and at a specified interest rate. Homebuyers can apply for a mortgage when they’ve chosen a property to buy or while they’re still shopping for one, a process known as pre-approval. Getting pre-approved for a mortgage can give buyers an edge in a tight housing market because sellers will know they have the money to back up their offers.
Once the buyer and seller have agreed on the terms of their deal, they or their representatives will meet at a closing ceremony. This happens when the borrower makes an advance payment to the lender. The seller will transfer ownership of the property to the buyer and receive the agreed amount, and the buyer will sign any outstanding mortgage documents. Lenders may charge a fee (sometimes in the form of points) for loan origination at closing.