A mortgage is a loan in which property or real estate is used as collateral. The borrower enters into an agreement with the lender (usually a bank) wherein the borrower receives cash upfront then makes payments over a set time span until he pays back the lender in full.
HOW IT WORKS (EXAMPLE):
Mortgage loans are usually entered into by home buyers without enough cash on hand to purchase the home. They are also used to borrow cash from a bank for other projects using their house as collateral.
There are several types of mortgage loans and buyers should assess what is best for their own situation before entering into one. Types of loans are characterized by their term dates (usually from 5 to 30 years, some institutions now offer loans up to 50 year terms), interest rates (these may be fixed or variable), and the amount of payments per period.
[If you’re ready to buy a home, use our Mortgage Calculator to see what your monthly principal and interest payment will be. You can also learn how to calculate your monthly payment in Excel.]
Mortgages are like any other financial product in that their supply and demand will change dependent on the market. For that reason, sometimes banks can offer very low interest rates and sometimes they can only offer high rates. If a borrower agreed upon a high interest rate and finds after a few years that rates have dropped, he can sign a new agreement at the new lower interest rate — after jumping though some hoops, of course. This is called “refinancing.”