Mortgage
A mortgage is a loan secured by real property in which the borrower pledges the property as collateral in exchange for funds to purchase or refinance it. The lender holds a security interest in the property until the loan is repaid in full, with the right to foreclose if the borrower defaults.
What This Means
How a Mortgage Works
A mortgage involves two key documents: the promissory note, which establishes the borrower's obligation to repay the debt, and the mortgage instrument (or deed of trust in some states), which pledges the property as security. The borrower retains possession and use of the property while making scheduled payments of principal and interest over the loan term.
Most residential mortgages are fully amortizing, meaning each monthly payment covers both interest on the outstanding balance and a portion of the principal. Early in the loan term, the majority of each payment goes toward interest; over time, the principal portion increases as the balance decreases.
Common Mortgage Types
- Conventional loans - Not insured or guaranteed by the federal government; may conform to Fannie Mae or Freddie Mac guidelines
- FHA loans - Insured by the Federal Housing Administration; lower down payment and credit score requirements
- VA loans - Guaranteed by the Department of Veterans Affairs for eligible service members; no down payment required
- USDA loans - Guaranteed by the U.S. Department of Agriculture for eligible rural and suburban properties
Key Mortgage Components
A mortgage payment typically includes four components, known as PITI: principal, interest, taxes, and insurance. Lenders often require an escrow account to collect property tax and homeowners insurance payments monthly, ensuring these obligations are met. The interest rate may be fixed for the entire term or adjustable, resetting periodically based on a benchmark index. Loan terms commonly range from 15 to 30 years , though other terms are available.