What Is a Mortgage and How Does It Work?

A mortgage is a loan that a borrower takes out to buy or maintain a home or other piece of real estate, and that the borrower undertakes to repay over time, usually in a series of regular payments. The property is used as security for the loan.

 Essential Mortgage TAKEAWAYS

  • Mortgages are loans used to purchase homes and other types of real estate.
  • The property is used as security for the loan.
  • Fixed-rate and adjustable-rate mortgages are two types of mortgages offered.
  • A mortgage’s cost is determined by the type of loan, the period (such as 30 years), and the interest rate charged by the lender.
  • Mortgage rates vary greatly depending on the type of product and the applicant’s credentials.

How They Work

Mortgage are used by individuals and businesses to purchase real estate without paying the whole purchase price up front. The borrower repays the loan, plus interest, over a certain period of time until they buy the property outright. “Liens against property” or “claims on property” are other terms for mortgages.

The Mortgage Application Process

Interested borrowers start the process by submitting an application to one or more mortgage lenders. The lender will need proof of the borrower’s ability to repay the loan, such as bank and investment statements, recent tax returns, and proof of current employment. In most cases, the lender will also conduct a credit check.

If the application is approved, the lender will make the borrower an offer for a loan up to a given amount at a certain interest rate. Pre-approval is a method that allows homebuyers to apply for a mortgage after they have decided on a property to purchase or while they are still looking for one.

Pre-approval for a mortgage can provide buyers an advantage in a competitive housing market by demonstrating to sellers that they have the financial means to back up their offer.

When a buyer and seller have reached an agreement on the terms of their transaction, they or their agents will meet at a closing. The seller will give the buyer possession of the property and receive the agreed-upon amount of money, and the buyer will sign any remaining mortgage agreements.


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