Mortgage

Mortgage companies and services in the United States

Mortgage, legal instrument that pledges a house or other real estate as security for repayment of a loan. By providing a guarantee that the loan will be paid back, a mortgage enables a person to buy property without having the funds to pay for it outright. If the borrower fails to repay the loan, the lender may foreclose on the property÷that is, force the sale of the house to recover the amount of the loan.

A borrower can obtain a mortgage from a bank, credit union, or other lender. Most lenders require the borrower to have a certain amount of money to use as a down payment toward the purchase of the house. Before the lender agrees to a loan, an appraisal of the property by a qualified third party is required.

To accept the loan the borrowers must sign a promissory note that obligates them to repay the mortgage debt. The borrower also promises to keep the property insured against fire and other hazards and to pay any property taxes that may be owed. If the borrower fails to keep any of these obligations, the loan is considered to be in default, and subject to foreclosure.

Mortgage payments consist of two parts: payments for interest and for principal. Interest is the fee for using the lender's money. Principal is the amount of the loan still owed. A portion of each payment pays interest and the remaining portion reduces the principal. When a homeowner begins to repay his or her mortgage almost all of each monthly payment pays for interest. This changes as the loan ages, even though the amount paid each month may not change. Each month's payment reduces the principal by a small amount, therefore less interest is owed the next month. Since less interest is owed, more of the payment can be used to reduce the principal. Gradually, less of each month's payment is needed to pay interest and more goes to reduce the principal.

The two most common mortgages in the United States are the fixed-rate mortgage and the adjustable-rate mortgage. With a fixed-rate mortgage the interest rate stays the same over the life of the loan. With an adjustable-rate mortgage the interest rate can change at the end of pre-determined intervals, such as every six months or every year. The interest rate is tied to changes in a published index that reflects the current interest rate.