What Is a Mortgage?

Since most home buyers don't have the financial resources to pay cash for a home, they borrow money from a lender in the form of a mortgage. A mortgage is a long-term loan that a borrower obtains from a bank, savings and loan, independent mortgage broker or credit union. The house and the land that it occupies, or if a condominium, the unit deed, serve as collateral for the loan. This means that you agree to forfeit your interest in the property to the lender if you are unable to repay the loan under the agreed upon terms. Mortgage loans are generally structured to be paid off in monthly installments over a 15- or 30-year period.

Every mortgage loan contains four components:
  1. PRINCIPAL: The amount of money you borrow
  2. INTEREST: The amount that you pay the lender for the use of the borrowed funds
  3. TERM: The amount of time in which you agree to repay the loan
  4. AMORTIZATION: The gradual reduction of a debt by periodic payments of interest and principal that are large enough to pay off a loan at maturity
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