A mortgage is not actually a loan but rather a lien on the property securing a loan. A mortgage has two parties: the mortgagee (lender) and the mortgagor (borrower). The mortgagee and mortgagor sign a mortgage contract. The two parties agree to the terms of the mortgage contract, with the mortgagee (lender) agreeing to lend to the mortgagor (borrower) the amount of money that is necessary to buy the property. The borrower then agrees to repay the loan, with interest, over the time period specified in the mortgage contract. The property secures the loan. The lender has the right to foreclose on the property if the borrower goes into default and does not make the mortgage payments.
There are several types of mortgages. The fixed rate mortgage is the most common. With a fixed rate mortgage the interest rate on the loan remains the same over the entire repayment period. Most fixed rate mortgages have repayment terms of fifteen or thirty years.
Adjustable rate mortgages (ARMs) have interest rates that adjust or change over the life of the loan, usually at specific time periods. The interest rate can either decrease or increase, depending on prevailing interest rates and market conditions. Usually the interest rate resets every six or every twelve months. Many individuals are attracted to adjustable rate mortgages because the initial interest rate is lower than fixed rate mortgages. However, the interest rate may increase if interest rates rise, which results in a higher mortgage payment. Therefore there is a degree of uncertainly with adjustable rate mortgages.
There are also hybrid ARMs, which is a cross between a fixed rate and adjustable rate mortgage. Hybrid ARMs initially have a fixed interest rate for a predetermined time period, that ranges anywhere from two to ten years. After this time period is over the interest rate adjusts every six or twelve months, just like an adjustable rate mortgage. The advantage to hybrid ARMs is that the the beginning interest rate is lower during the initial years of the loan. These types of loans can be a good option for borrowers who may not plan to own the house long term.
Mortgages also have closing costs and sometimes private mortgage insurance, as well as property taxes on the property itself. If there is less than a twenty percent down payment, then private mortgage insurance is usually required. Sometimes property taxes are held in escrow and paid out of the mortgage payments and sometimes the borrower pays the taxes directly to their local governmental entity.
Mortgages are very useful arrangements as they allow businesses and individuals to buy property without needing to pay the full purchase price. A mortgage also provides the lender with protection by providing them with a lien on the property in case of default.