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What Is a Mortgage?

A mortgage is a legal document you sign when you buy or refinance a home that gives the lender the right to take the property if you don’t repay the loan.
July 25, 2018
Finding the Right Mortgage, Mortgages
What Is a Mortgage?
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“Mortgage” comes from the Latin word mort, meaning death — as in “this debt is yours until you die.” Mortgages are more flexible than their root word implies, but these legal agreements that cement your responsibility to repay your home loan are still a big commitment.

What is the definition of a mortgage?

A mortgage, or deed of trust in some states, is a legal document you sign when buying or refinancing a home that gives your lender the right to take the property if you don’t repay the loan as agreed. A copy of your mortgage is filed in the county records as a lien, or legal claim, against the home.

» MORE: How to choose the best mortgage

What is a promissory note?

A promissory note is another loan document you’ll sign, promising to repay the money you’ve borrowed, with interest. It goes hand-in-hand with a mortgage.

» MORE: Calculate how much house you can afford

What’s included in a mortgage payment?

The term mortgage can also refer to the loan itself. When buying a home with a mortgage, you’ll make regular monthly payments until you pay off the balance of your loan. Your payments can cover several costs, including:

Principal

A loan’s principal balance is the amount that’s left to pay back — your original loan amount minus payments you’ve made against that balance. For example, if you borrowed $200,000 and repaid $24,000 toward that original amount, the remaining principal balance is $176,000. With an amortizing mortgage, like a 30-year fixed-rate mortgage, some of each payment reduces the principal owed and some pays for interest; the full balance will be paid entirely by the end of the loan term.

Interest

The interest rate on your mortgage determines how much you’ll pay the lender in exchange for borrowing the money.

» MORE: How to get the best mortgage rate

Taxes

Your lender may collect property taxes along with your mortgage payment and keep the money in an escrow account until your property tax bill is due, paying it on your behalf at that time.

Homeowners insurance

Homeowners insurance, which can cover damage from fires, storms, accidents and other catastrophes, usually is required by mortgage lenders. They may collect the premiums with your mortgage payment and then pay the insurance bill out of your escrow account when it’s due.

Mortgage insurance

When you make a down payment of less than 20% of the purchase price, lenders typically require you to pay for mortgage insurance. Mortgage insurance protects the lender against the risk that you’ll default on the loan. There are two types: private mortgage insurance, or PMI, and forms of mortgage insurance required for government-backed loans, such as FHA loans (insured by the Federal Housing Administration). The premiums may be billed in your monthly mortgage statement.

Compare personalized mortgage rates.

What is a second mortgage?

A second mortgage is a loan on a home that has a first, or primary, mortgage. It, too, uses the home as collateral. If you can’t make your mortgage payments and the home is sold, the second mortgage — also called a junior lien — is second in line to be paid off, after the first mortgage. Home equity loans and home equity lines of credit are second mortgages.

Where can I find a mortgage I can afford?

Offers for mortgages are plentiful — online, on buses, benches, billboards, and wrapped around cars. Mortgage loans are available from banks, credit unions, nonbank lenders, mortgage brokers and, on a smaller scale, insurance companies. Even family members can provide mortgage loans.

To find the best mortgage for you, consider applying with at least two lenders, so you can compare offers.

Lenders offer a variety of loans, each with pros, cons, eligibility criteria and rules. With each, you’ll select a term — the loan’s timespan — and choose among interest rates offered to you by lenders based on your credit score and other criteria.

The most-common home loan programs are:

  • Government-backed loans: These include FHA loans, VA loans, and U.S. Department of Agriculture Rural Development Guaranteed Housing mortgages. They can be especially attractive to first-time home buyers and those with little cash saved, as they may feature lower interest rates, low (or no) down payments and more forgiving qualification criteria.
  • Conventional mortgages: These conform to mortgage financing agencies Fannie Mae and Freddie Mac’s stiffer requirements. A 620 credit score or better is required. Down payments can be as low as 3%, although mortgage insurance is required for down payments of less than 20%.

In addition to selecting a mortgage program, you’ll choose among fixed-rate and adjustable loans:

  • Fixed-rate: The interest rate and basic loan payment are the same as long as you have the loan.
  • Adjustable: The interest rate can change at intervals spelled out in the mortgage contract, and that can make your monthly payment increase or decrease.

» MORE: Types of mortgages and who they’re best for

When you’re ready to apply for a home loan, keep an eye on current mortgage rates because they affect affordability and how much you can borrow.

NerdWallet’s mortgage affordability calculator shows how much house you can afford with a comfortable monthly payment.

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