What Is a Mortgage?


A mortgage is essentially a loan, usually given by a bank, to provide individuals and families with funding to secure housing. Mortgages fall into the larger category of financial loans, but are specifically designed for real estate. Mortgages contain several different components, which include collateral, principal, taxes and insurance.

Mortgages vary in amount and have different payment options. Most mortgages operate on 15 to 30 year time periods, and allow borrowers to make repayments typically on a monthly basis. The amount of time allotted for repayment varies depending on the size of the mortgage and the lender, and typically requires repayment of the original amount of money loaned and an additional interest fee.

Mortgages are typically established during contracts when homeowners purchase new homes. As with the new home, buyers sign a legal contract upon securing a mortgage, which acknowledges that they understand to the terms of the loan and will make repayments as indicated. This legal promise, which includes repayment of the loan and all additional fees, uses the new home as a collateral for the loan. Upon signing a contract, owners agree to repay the original loan amount, called the principal, and interest, which is calculated in a percentage, and is called the interest rate. Most lenders penalize for late payments using a system of points, and may even foreclose on a home.