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What is a Mortgage? and How does it Work?

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What is a mortgage?

A mortgage is a type of loan which is used to purchase a home, plot of land and other types of real estate. When someone wants to buy a property but doesn’t have full money at that time, they can take a mortgage from the bank or from different mortgage lenders.

To give the mortgage, the lender places a legal claim against the property, until the loan is paid. The property might be taken permanently by the lender if the borrower doesn’t pay the loan. The mortgage application goes through many processes to ensure there is no scam.

How Does it work?

Mortgages are used by individuals and different companies to purchase real estate without paying the whole amount at one time. The borrower gets the loan from the lender and in turn gives the money with interest. The payments the borrower has to pay regularly remain the same while with each payment  the interest will be paid separately over the whole life of the loan.

The lender will ask for confirmation that the borrower is capable of paying back the loan on time.

In the confirmation process it may include the bank statement of the borrower, recent tax payments, check the credit  and many others. 

If the application is approved by the lender, a specific amount of loan will be offered to the borrower with a particular interest rate. Homebuyers can apply for a mortgage even when they are still searching for a home.

This happens just because of the pre-approval process. The mortgage pre-approval gives benefit by showing a good reputation of the borrower in front of the lender before taking loan.

One last meeting is held between buyer and seller to agree on terms of deal. The seller has to pay the down payment to the buyer at closing. The ownership of the property is transferred to the buyer and seller receives the agreed-upon amount of money.

Final mortgage papers are signed by the buyer, the fees for setting up the loan might be charged by the lender at the closing too. In this way, an official deal is finished by sorting out everything.

Types of Mortgage:

Different types of mortgages are available on the basis of type of property. It also depends upon the borrower’s credit score and the ability to bear the loss. The most common types of mortgage are:

Fixed Rate Mortgage:

The interest rate remains the same in the entire term of the mortgage with the fixed-rate.  Mortgage rate is dependent upon the borrower’s credit score, down payments, mortgage loan terms and the lender. 

Adjustable-Rate Mortgage:

Unlike the fixed-rate mortgage, in adjustable-rate mortgage (ARM)  interest rate changes after sometime of the loan. After the first change, the interest rate usually changes every year thereafter. Interest rates can decrease or increase based on various factors.

In an ARM where the interest rates can change, depend upon the factor that may go up and down like the prime rate. While, payments of the borrower might go down due to change of rates and it can be seen theoretically.

ARMs are beneficial for the people who have short-term plans of buying a house. Before the change of rates people switch to different types of mortgage.

Government-Backed Loans:

Direct-issue and insured are two categories of government-backed mortgages. The government directly issues the loans through different government agencies like the Federal Housing Administration, United States Department of Agriculture and others.

Government issues these loans specially for householders with low-income and for those who can’t pay the down payments. Another one is the insured loans, including the agencies like FHA and USDA managed the programs.

It also includes loans issued by banks and by other lenders and then sold to Fannie Mae or Freddie Mac. These loans are specially designed to help the people buy homes, loans can be given directly 

Jumbo Loans:

Jumbo loans are a little bit different from the other types of mortgage loans. These are the regular loans, but they are bigger than others. Jumbo loans are made for those who want to purchase a home in different parts of the U.S.

The price can be increased if the home is at a pricier area which could exceed the $765600. As these loans are bigger , they might have extra rules and high interest rates.

Balloon Loans:

Balloon loans are mortgages in which if the borrower just pays the normally scheduled payments, the loan will remain unpaid when the term ends. These types of loans are not “fully amortized”. The interest on the loan is structured and lasts longer than the loan term. 

Here’s the problem when you have to pay off the whole amount when terms end for that mortgage. Often more these payments are refinanced by folks to avoid paying all balloon payments at once, but this doesn’t always work.

How to Compare Mortgages

However, before the turn of the century, banks and credit unions were considered to be places for mortgages. However, presently, the mortgage market is not limited to a bank lender alone; now nonbank lenders such as Better, loan Depot, Rocket Mortgage and SoFi have stormed into the scene.

As a customer in the market for a mortgage, it is easy to walk with online mortgage calculators; they are just so very useful. They allow you to compare projected monthly payments that are based on other things such as type of mortgage, interest rates and your down payment size.

Additionally, they assist you in determining what sort of real estate your budget can afford. Apart from your mortgage principal and interest obligations, your lender may demand setting up an escrow account.

This particular account includes property taxes levied on the local authorities; homeowners insurance and miscellaneous expenses all rolled into your monthly mortgage payment.

Do bear in mind that if your advance payment stays below 20% of the total cost, your lender could request you to purchase a private mortgage insurance (PMI). This increases your monthly billings and needs to be included in your budget.


This is very important for the people who want to acquire an asset through a credit facility. A mortgage is a loan that gives an opportunity to purchase real estate and needs are different with individual circumstances.

One should look at mortgages offered by several lenders and evaluate their merits, including the optional private mortgage insurance. As a whole, becoming well-versed in mortgages can ensure that borrowers make objective judgments and utilize the buying process more sensibly.


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