What is a Mortgage and How Does It Work?

What is a Mortgage and How Does It Work?

What is a Mortgage and How Does It Work

A mortgage is a type of loan used to finance the purchase of a property, typically a home or real estate. It is a legal agreement between a borrower (the homeowner) and a lender (such as a bank or financial institution), where the lender provides funds to the borrower to buy the property. The borrower then repays the loan amount, plus interest, over an agreed-upon period.

how does a mortgage work?

The borrower applies for a mortgage by submitting their financial information, credit history, and details about the property they intend to purchase. The lender evaluates the application and determines the loan amount and interest rate based on factors such as creditworthiness, income, and the property’s value.

The borrower typically pays a down payment, which is a percentage of the property’s purchase price. The down payment serves as an upfront payment towards the total cost of the property and helps reduce the loan amount.

Once the lender approves the mortgage application, they provide the borrower with the loan amount agreed upon. The borrower then becomes the legal owner of the property. The lender places a lien on the property as security for the loan.

The borrower repays the loan over a specified period, known as the loan term. Each repayment consists of two components: the principal amount (the original loan amount) and the interest (the cost of borrowing).

The interest rate determines the cost of borrowing and calculates it as a percentage of the outstanding loan balance. It can be fixed (remains the same throughout the loan term) or adjustable (fluctuates based on market conditions).

The borrower makes regular monthly payments, which typically fix the loan term. These payments go towards reducing the loan balance and covering the interest charges. A portion of each payment also goes towards escrow accounts to cover property taxes and insurance.

The loan is a useful structure with an amortization schedule, which outlines the repayment plan over the loan term. In the early years, a larger portion of the monthly payments goes towards interest. While the principal repayment gradually increases over time.  For more details, contact us.