A mortgage loan, or simply a mortgage, is a type of loan to finance the purchase of a real estate property, such as a house in a residential mortgage. The property that the borrower purchased will serve as a collateral to secure the loan. The borrower or mortgagor will pay the loan, along with interest and insurance payments, in increments for a predetermined period of time until it is all paid in full, according to Investopedia.
Apart from the collateral, there are other several working parts in a loan. These include the principal and interest, taxes and insurance. The lender or mortgagee, such as a bank, will essentially have a claim on the collateral until the mortgagor has paid the loan in full. Should the borrower fail to pay the loan, the lender has the right to sell the collateral to cover the debt.
The principal is the amount of money borrowed from the lender and it will earn interest during the payment period. The property will also incur property taxes, which will be used for financing the cost of running the community, according to Realtor.com.
Lenders will require borrowers to have the property insured, the cost of which will be added to the loan payments. Insurance will make the collateral more secure, which will essentially cover it from losses such as in the event of fire, natural calamities and theft.