What Is a Mortgage and What Does It Mean for You?

What Is a Mortgage and What Does It Mean for You?


What is a mortgage? A surprising number of people do not really understand the answer to that basic question. The definition used by the Small Business Administration tells  what is a mortgage the tale. A mortgage is a loan to acquire real estate with the property in question as collateral. You borrow enough money from a lender to purchase a piece of real estate. In exchange for that money, you agree the lender has the right to take that real estate if you ever default on the loan. So, if you fail to make your mortgage payments, the lender will eventually have the right to take that property away from you.

When it comes to borrowers, a mortgage can mean much more than a loan to secure real estate. Since mortgages usually span periods from 10 to 30 years, it is a huge financial commitment for many people. Many people would not have the ability to save up enough money to buy a house with cash. Using a mortgage opens up opportunities they would not have otherwise. Many people see buying a house as part of their independence in this world. The long commitment can be a bit daunting for many. It takes a smart consumer to realize the full potential offered.

The many types of mortgages out there may confuse you. There are fixed rates and variable rates. There are 10-year, 15-year, 20-year, and 30-year mortgages. And there are combination’s of each type. A fixed rate loan means you pay the same interest rate for the entire life of the loan. A variable or adjustable rate mortgage means you pay an interest rate that the lender can change during the life of the loan. The lender usually associated the interest rate on a variable loan to a specific federal lending rate. When that rate rises, your mortgage rate rises. When it falls, your rate falls.

The length of the mortgage determines a few things. The longer the loan period, the higher your interest rate goes. But, the payments are lower for longer loans. Many people want to pay their mortgage off faster, but cannot afford the higher payments on a shorter-term mortgage. Any borrowers must assess this trade-off for themselves. Some choose to get the longer-term mortgage but start paying extra principal. This shortens the loan length without raising their required payments. If they need the extra cash, they can skip the extra principal payment.

Save yourself time and money with our 5 simple steps to understanding mortgage basics.

When is the best time to apply for a fixed rate mortgage? What are adjustable rate mortgages based on? Should you opt for a 15 or 30 year mortgage? What are the advantage of FHA loans? And should you use a broker or bank? We answer these and other questions in short easy to read articles written without “mortgage speak”.


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