Definition
The term mortgage is used to describe a pledge of property to a lender to ensure the borrower repays the lender the entire loan. The terms on a mortgage will include the length of the loan, interest rate charged and, optionally, the upfront payment of points.
Explanation
Mortgages can be obtained from a variety of lending institutions, including local banks. Consumers can make fair comparisons by using each loan's annual percentage rate, or APR, which takes into consideration the full cost of the mortgage. The APR adjusts for both the interest rate charged, points paid, as well as loan application and other processing fees.
Also known as a lien against property, a mortgage is considered a secured loan, since the property is pledged as collateral. If the homeowner fails to make payment in a timely manner, the lender has the legal right to seize the property (foreclose) and sell the home. The proceeds from the sale are then used to repay the outstanding principal of the mortgage.
There are a wide variety of mortgages found in the marketplace, including:
Fixed Rate: also referred to as a conventional mortgage, provides for a fixed rate of interest for the duration of the loan.
Adjustable Rate Mortgages: also known as variable rate mortgages, these loans can offer a fixed interest rate in the near term; the interest charges are then linked to an index (such as LIBOR or a CPI) and allowed to vary over the remainder of the loan's term.
Balloon Loan: a loan that ends before the principal of the loan is completely paid off.
Interest-Only Mortgage: also known as a non-amortizing mortgage, payments are sufficient to cover the interest charges, but the outstanding principal does not decline overtime.
Various combinations of the above mortgage types are also available to homebuyers, with the length of these loans typically ranging from ten to thirty years.
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