A mortgage is an agreement that allows a lender to seize property when a borrower fails to pay.
What does that mean in the real world? In most cases, the term mortgage is used to refer to a home loan: if you don’t pay the loan as agreed, your lender can foreclose on the property.
Mortgage and "home loan" are often used interchangeably. However (if you want to get technical), the mortgage is really the agreement that makes your home loan work. In real estate, agreements need to be in writing, so a mortgage is a document that gives your lender the right to foreclose on your home.
Mortgages Make it Possible
Real estate is expensive. Most people don’t have enough cash on hand to purchase a home with savings, so they borrow money. Banks realize this, and they’re in the business of charging interest on loans, so they offer real estate loans. But the only way to get those loans – the only way the bank will give you hundreds of thousands of dollars – is to use collateral. When you pledge the property as collateral (by using a mortgage agreement), the bank is protected against your failure to pay.
Mortgages are often used by consumers, but businesses can also purchase property with a mortgage.
Types of Mortgages
You might hear about several different types of mortgages. Again, if you want to be a stickler, we’re talking about different types of loans – not different types of mortgages (because the mortgage is simply the part that says they can foreclose if you don’t pay the loan in question).
Fixed-rate mortgages are the simplest type of loan. Given a loan amount, an interest rate, and a number of years to repay the loan, your lender calculates a fixed monthly payment. You’ll make that exact same payment for the entire term of the loan (unless you pay more than is required or refinance the loan). Fixed rate mortgages typically last for 30 or 15 years, although other terms are not unheard of.
Learn more about how to calculate mortgage payments and how the different inputs affect your payment.
Adjustable rate mortgages are similar, but the interest rate can change at some point. When that happens, your monthly payment also changes – for better or worse. Rates typically change after several years, and there are some limits as to how much the rate can change.
Second mortgages allow you to add another mortgage and borrow more money. Your second mortgage lender is “in second position,” meaning they only get paid if there’s money left over after the first mortgage holder gets paid.
Reverse mortgages provide income to people who have sufficient equity in their homes. Retirees sometimes use a reverse mortgage to supplement income or to get cash out of homes that they paid off long ago.
"To Mortgage" – What does it Mean?
Now that you understand what a mortgage is, it might make sense when you hear that somebody "had to mortgage" something. The idea is that they wanted something valuable, and they had to pledge something else valuable in order to get the thing they wanted.