What is a Mortgage?

A mortgage is a loan that is used to pay for real estate. The loan typically requires a fixed schedule of repayments over a number of years, where each payment includes an interest charge and a principal paydown. The underlying real estate is used as collateral on the loan. If the borrower does not make loan payments on a timely basis, the lender can seize and sell the property, using the proceeds to pay off the remaining loan balance.

Types of Mortgages

The most common mortgage is the fixed-rate variety, which locks in a fixed interest rate for the life of the loan. An adjustable-rate loan is also available, which tracks the prime rate. Adjustable-rate loans are riskier for the borrower, since a jump in the prime rate can trigger a substantial increase in mortgage payments. Another option is the interest-only loan, where the borrower is not paying back any principal at all. A variation on the interest-only concept is an obligation for the borrower to pay a single large balloon payment at the end of the mortgage that covers the entire principal balance.

A different approach to mortgages is the reverse mortgage, where a homeowner can borrow against the value of his or her home, resulting in cash for retirement purposes. The loan balance becomes due upon the death of the borrower, or when the homeowner sells the house. In effect, this approach allows a homeowner to use his or her home asset to fund retirement.