A mortgage is a type of loan specifically used to purchase real estate, where the property itself serves as collateral for the loan. The borrower agrees to repay the loan over a set period (typically 15 or 30 years) with regular monthly payments that include both principal and interest. If the borrower fails to make payments, the lender can foreclose on the property. Mortgages are the most common way people finance home purchases, as most buyers cannot pay the full price upfront.
Mortgage
Definition
A mortgage is a type of loan specifically used to purchase real estate, where the property itself serves as collateral for the loan. The borrower agrees to repay the loan over a set period (typically 15 or 30 years) with regular monthly payments that include both principal and interest. If the borrower fails to make payments, the lender can foreclose on the property. Mortgages are the most common way people finance home purchases, as most buyers cannot pay the full price upfront.
Example
A homebuyer purchases a $400,000 home with a 20% down payment ($80,000) and takes out a $320,000 mortgage at 6.5% interest for 30 years. The monthly payment (principal and interest) would be approximately $2,023. Over the life of the loan, the total interest paid would be approximately $408,280.
Key Points
- 1Fixed-rate mortgages lock in the interest rate for the entire term
- 2Adjustable-rate mortgages (ARMs) have rates that change after an initial period
- 3A 20% down payment avoids private mortgage insurance (PMI)
- 4The amortization schedule shows how each payment splits between principal and interest