What Is a Mortgage?
Mortgage is a debt used to buy or maintain a home, land and other types of real property. The debt is paid over time in a series of monthly payments, usually including principal and interest, which are sometimes referred to as PITI, or principal, interest, taxes and insurance. The borrower pledges their property as collateral for the debt, and in the event of default, the lender can claim ownership of the property to recoup their loss. Mortgages can be funded through the banking system as loans, or in capital markets, where pools of mortgages are bundled into securities and sold to investors.
Mortgages are the biggest financial obligations most of us will assume in our lives, and they are a key component of homeownership. They allow people who would otherwise not be able to afford the purchase price of a home to become owners, by paying only a fraction of the cost upfront and taking out the rest in loan form. The remainder of the loan is secured by the home itself, and the borrower makes monthly payments on the debt until it is fully repaid or the mortgage is “redeemed” (either by paying it off in full, or in a gradual fashion over the course of the loan term).
There are many steps involved in applying for a mortgage. Borrowers must meet several criteria, including minimum credit scores and down payments, before the application process can begin. They must also gather documents, such as paystubs and previous tax returns, lists of assets and liabilities, bank statements, employment information, a credit report, and any documentation of financial gifts from family members that might be used towards the down payment. Applicants then submit their completed applications to one or more mortgage lenders, who will review them for eligibility and underwriting requirements.
Once a borrower is approved for a mortgage, the lending institution will give them a loan estimate that specifies how much they can borrow and what the terms of the loan are. In most cases, the mortgage will be a 30-year loan with monthly payments that include both principal and interest. Over the course of the mortgage’s term, a portion of each monthly payment will go toward the reduction of the principal, and a larger portion will be applied to the interest charges.
The word “mortgage” derives from an Old English and French phrase meaning “death pledge,” and it is an apt description of this type of loan. Like any other type of debt, the mortgage will end either when it is paid in full or when the property is redeemed, or “foreclosed” on by the lender. Foreclosure is a legal process whereby the lender can claim title to the property, evict the residents, and sell it on the open market to recover the amount of the debt that remains unpaid. It is a common practice in many countries where there are large numbers of homeowners who do not have sufficient liquid savings or equity to purchase their homes outright.