Definition:
A mortgage is a loan used to buy real estate, where the property itself serves as collateral. The borrower agrees to repay the loan over time with interest, and the lender can take ownership of the home if payments aren't made.
Example:
Alex wants to buy a $350,000 house but doesn’t have enough cash to pay the full price. He applies for a mortgage, puts down $50,000, and borrows the remaining $300,000 from a bank. He agrees to pay the loan back over 30 years in monthly installments.
Explanation:
A mortgage allows buyers to purchase a home without needing the full purchase price upfront. The borrower repays the loan in monthly payments that include:
- Principal – the original amount borrowed
- Interest – the cost of borrowing the money
- Taxes and Insurance – often included in the monthly payment as part of an escrow account
There are different types of mortgages:
- Fixed-rate: Interest rate stays the same for the life of the loan
- Adjustable-rate (ARM): Interest rate can change over time
- Government-backed: Includes FHA, VA, and USDA loans with special terms for qualified borrowers
The mortgage process involves applying for a loan, getting approved, undergoing a home appraisal, and finalizing the agreement at closing. If the borrower fails to repay the loan, the lender has the legal right to foreclose and sell the property to recover the money.
Why is a Mortgage Important in Real Estate Transactions?
Mortgages are essential in real estate because they make homeownership possible for most buyers. Understanding how mortgages work helps buyers make informed decisions about affordability, interest rates, and loan terms. For sellers, a buyer’s ability to secure a mortgage is critical to completing a sale. Mortgages are at the heart of most real estate deals.