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A mortgage is a legal instrument that pledges real estate as security for the repayment of a loan. A mortgage allows an individual to obtain a property without having the funds to pay for it in full, by providing a guarantee that the loan will be repaid. Should the individual neglect to repay the loan, the lender can foreclose on the property by forcing the sale of the real estate to recover the amount of the loan.
The borrower can get a mortgage from a credit union, a bank, or another lender. Most lenders require that the individual has a certain amount of money to make a down payment toward the purchase of the property. The lender will also require the borrower to provide detailed information regarding his or her ability to repay the loan. The borrower will need to answer specific questions concerning his or her income, employment history, and credit history. Information about the borrower's debts, including car loans and credit card balances, will also be required.
An appraisal of the property, conducted by a qualified third party, will be required before the lender agrees to the loan. The appraisal will determine the value of the property to ensure that it is worth at least as much as the amount of the loan in case a foreclosure is necessary.
If and when all of these requirements are satisfied, the lender will agree to the loan. The current interest rate and the repayment terms are included in the loan agreement. Repayment terms include the amount of the regular payments, the frequency of the payments, and the period of time over which the payments will be made. The duration of the mortgage and the interest rate will help to determine the amount of regular payments. Regular payments are typically made once per month and the duration of the mortgage will usually be between fifteen and forty years.
To formally accept the loan, the borrower must sign a promissory note that obligates them to repay the debt of the mortgage. The borrower also promises to insure the property against fire and other hazards, and to pay the necessary property taxes that may be owed. Should the borrower neglect to satisfy such requirements, the loan is considered to be in default and therefore subject to foreclosure.
The closing is defined as the actual transfer of funds and property. At the closing, the lender transfers the money to the borrower for buying the property and the borrower signs the documents pertaining to the mortgage. The borrower pays the lender any fees associated with borrowing money including origination costs for creating and processing the loan, fees for acquiring credit history reports, and fees for obtaining an appraisal of the property from a third party. The mortgage lending process consists of two parts, the note and the mortgage. The note articulates the financial terms of a loan agreement, while the mortgage contains a legal description of the property and a statement pledging the property as security for the loan. The term mortgage typically refers to both aspects of the loan agreement.
Mortgage payments consist of two parts; payments on interest and on principal. The interest refers to the fee for using the lender's money, while principal is the actual amount of the loan that is still owed by the borrower. With each payment made by the borrower, the interest is paid and the remaining balance of the payment goes toward the principal. The practice of paying the principal debt while paying the interest is referred to as amortization.
When the borrower (now, the homeowner) starts making monthly payments, the majority of each payment goes toward the interest owed to the lender. The monthly payment amount may not change, but what the payment is applied to does. In the beginning, interest is paid, but over the duration of the mortgage a larger portion of the monthly payment goes toward reducing the principal debt. The relationship between the amount of each monthly payment that goes to interest and principal changes throughout the life of the loan.