A mortgage is a home loan secured by the value of the property it is used to purchase. In other words, if you do not have the cash to buy a home, a mortgage lender can make up the difference as long as you pledge to both abide by an agreed upon payment plan and, in the event that you do not live up to your end of the bargain, forfeit your ownership of the home.
A mortgage is likely to be one of the most important financial products you’ll ever get simply because buying a house is likely to be one of the most expensive transactions you’ll ever make. Mortgages are also quite complex given the myriad factors that comprise them, the intricate differences between mortgage types, the breadth of mortgage industry jargon, all the numbers that you must somehow make sense of in order to get the best mortgage offer, and the logistics that come with purchasing a new home.
The most important parts of a mortgage are as follows:
• Principal: The amount you initially borrow. The principal plus your down payment equals the sale price of your home.
• Interest Rate: How much your principal grows due to the passage of time. Mortgage rates are either fixed, which means they never change, or variable, meaning they change on a recurring basis, usually after an initial fixed period.
• Duration: The time period in which you are required to pay off your mortgage loan.
• Lender’s Fees: The costs charged by a lender for the processing, review, and ultimate fulfillment of a mortgage application.
• Points: You can purchase a reduction of your interest rate by buying what are known as “mortgage points” or “discount points.”
When you take out a mortgage, you will also be required by your lender to purchase certain types of insurance. All borrowers have to get title insurance and homeowner’s insurance, and depending on where your new home is located, you may also have to get flood insurance.
You can get a mortgage from a number of different sources – including banks, credit unions, and mortgage brokers – but it’s important to remember that it really doesn’t matter where you get your mortgage, what matters is the terms you get. Also keep in mind that there’s a large secondary market for mortgages, which means your mortgage may get sold at some point, though your terms won’t change.
Finally, in order to fully answer the question of what is a mortgage, we must point out what a mortgage is not. A mortgage is not something to take lightly or to gamble with. Before taking out a mortgage, you should conduct thorough research and, most importantly, determine whether or not you will be able to make payments in the event of a financial emergency.
After all, you don’t want to lose your home when in between jobs or due to unexpected medical bills. You also don’t want to have a foreclosure on your major credit reports because it will remain for seven years, significantly damage your credit standing, and serve as a glaring red flag for other potential lenders.