Mortgage (also known as liens against property or claims on property) is a loan that is proposed for buying real estate. This type of loans has some specific features:

  • Mortgages usually are long-term loans, from 15 to 30 years or even longer. So, usually just some categories of people can receive mortgage (not younger 20-25 years and not older 45-50 years).
  • Mortgages always are secured by a real property - purchased or existing real property (a collateral for a loan). The bank or financial institution, is given security (a lien on the title to the real property) until the loan is paid off in full.

    If the borrower defaults on the loan, or doesn't pay back the loan, the bank would have the legal right to repossess the real property (a collateral) and sell it, to recover sums owing to it.

  • The borrower of a mortgage is obliged to pay back with a predetermined set of payments that contain:
    • a principal amount (the original size of the loan),
    • interests (a financial charge for use of the principal amount),
    • insurance (if applicable),
    • other charges (be very careful, you should analyze all fees and charges before signing the agreement!).
  • Sometimes financial institutions or banks that proposed mortgages, require:
    • additional insurances for that type of loans,
    • additional property as collateral (so, will be two or more properties as collateral for one mortgage),
    • schedule of provision documents of the borrower's financial status, status of the property, etc.
  • Many aspects of mortgage lending usually are regulated by government, directly through legal requirements or indirectly through the financial industry, markets, etc. Other aspects may be regional, historical, or driven by specific characteristics of the legal or financial system.

There are different types of mortgages, some of popular ones:

  • A fixed-rate (traditional) mortgage is a mortgage with fixed interest rate for the full term of the loan. The monthly principal and interest payment never change from the first mortgage payment to the last.
  • An adjustable-rate mortgage (ARM) is the most popular mortgage with the changeable interest rate. The interest rate can be changed regarding to the market situation.

    The initial interest rate of ARM is often a below-market rate, which can make a mortgage seem more affordable than it really is. But after that initial period with fixed interest rate, it will be changed.

    Be careful and read all mortgage agreement to find the paragraph about changing interest rate. Sure, the interest rate could decrease. Do you really believe this?

There are some other types of mortgages, such as interest-only mortgages or ARM with payment options, etc.

Olga Slipchenko