What It Is:
A mortgage is a loan in which property or real 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:
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 and interest paymentwill be.]
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 only 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."
Why It Matters:
Mortgages make larger purchases possible for individuals lacking enough cash to purchase an asset, like a house, up front. Lenders take a risk making these loans as there is no guarantee the borrower will be able to pay in the future. Borrowers take risk in accepting these loans, as a failure to pay will result in a total loss of the asset.
Home ownership has become a cornerstone of the American Dream. For most people, their home is their most valuable asset. Mortgages make home buying possible for many Americans. Mortgages are not always easy to secure, however, as rates and terms are often dependent on an individual's credit score and job status. Failure to repay allows a bank to legally foreclose and auction off the property to cover its losses.