A mortgage is a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property itself then serves as collateral to secure the loan.
Key components include:
- Down Payment: The upfront cash payment you make toward the purchase price (typically 3%–20%).
- Principal: The actual amount of money you borrowed.
- Interest: The cost of borrowing the money, expressed as a percentage rate.
- Term: The length of time you have to repay the loan (commonly 15 or 30 years).
- Amortization: A schedule of payments where, early on, most of your money goes toward interest, while later payments go mostly toward the principal.
- Escrow: Often, lenders collect extra money each month to pay for property taxes and homeowners insurance on your behalf.
If a borrower fails to make payments, the lender can take possession of the property through a legal process called foreclosure.