A mortgage is a type of loan that is used to buy real estate or property. It’s a legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender’s security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full.
Typically, a bank or mortgage lender will provide the money upfront to purchase the property, and the borrower will repay the loan over a set period of time with a specified interest rate. The repayment of the loan includes both the principal (the amount originally borrowed) and interest (the cost of borrowing the money).
There are various types of mortgages, including fixed-rate mortgages, where the interest rate remains the same for the life of the loan, and adjustable-rate mortgages, where the interest rate can vary after a certain period of time.
Example of a Mortgage
Let’s say you want to buy a house that costs $300,000, but you only have $60,000 for the down payment. You would need to borrow the remaining $240,000 to purchase the home. You approach a bank or a mortgage lender and they agree to lend you the $240,000, under the condition that the house itself will be used as collateral. This means that if you fail to make your mortgage payments, the bank could take possession of the house and sell it to recoup their losses.
You and the bank agree on a 30-year fixed-rate mortgage with an interest rate of 3%. This means you’ll make payments for 30 years, and the amount you pay won’t change over that time due to interest rate fluctuations.
Each month, you’ll make a payment that goes partly toward reducing the principal (the original $240,000) and partly toward paying the interest on the loan. If you make all the agreed payments over the 30 years, you’ll have fully repaid the $240,000 and the accumulated interest. At that point, the mortgage will be discharged, and you’ll own the house outright.
If, however, you were unable to make your mortgage payments, the bank could initiate foreclosure proceedings to take ownership of the house and sell it to recover the money they lent you.