What is a Mortgage and Why Do You Need One?
Updated: May 19
If you’re planning to buy a house, chances are you’ve heard the term mortgage before and wondered exactly what is a mortgage? The word can mean different things to different people, but when you take out a mortgage to purchase a home, you take out a loan in order to do so.
This loan comes with interest rates that fluctuate with the market and needs to be paid back over time through monthly payments – or principal and interest as many people call it.
In short, a mortgage is a financial loan secured against a property (mortgage means loan until death), and you need one because most people cannot buy a property outright because of the very high cost of doing so.
What is a mortgage
A mortgage loan, or simply mortgage, is used to purchase a home. It's essentially an agreement between you and your lender that says, You give me X amount of money; I give you title to my house.
You get title to your house as long as you make your payments on time—at which point, after paying down your loan, it becomes fully yours.
Mortgages typically last 25-30 years. When they expire, lenders generally allow homeowners to refinance them into another new 30-year loan. This option can be used over and over again throughout your home ownership until (and sometimes even after) its paid off.
The idea here is that homeowners stay current on their loans so they don't lose their homes through foreclosure.
Why do you need a mortgage?
A mortgage is simply an agreement to pay someone money over time with interest. This works really well for those looking to purchase property but don’t have enough funds available right now. Interest rates vary, so shop around for a good rate that makes sense for your budget.
Additionally, make sure you’re only paying back as much as you can afford – many people find themselves in debt due to interest rates or unforeseen circumstances that end up costing them more than anticipated.
That said, having your own home will likely save you money in other areas such as rent and utilities, so if you plan on staying in your house longer than five years it could be worth considering.
A mortgage is essentially what makes home ownership possible. It's a loan that you take out in order to pay for part of your home's purchase price.
The bank or other lender will then lend you enough money to complete your purchase, but it will also require that you make monthly payments to repay that loan over time.
The portion of your home's price for which you're repaying money with each payment (known as principal) has been used by others before and represents real value in your home; it becomes an asset rather than debt once fully paid off.
If you want to learn more about mortgages, check out HowStuffWorks' guide on What Is A Mortgage? for details on how these loans work and information on different types of mortgages available today.
Should I get a mortgage?
A home purchase or refinance often requires some form of financing, which may take several forms. The process begins with your deciding whether to get a mortgage or other type of loan.
Mortgages come in many forms but in general they involve taking out a loan against an asset—in most cases, your home.
You then make monthly payments on that loan until it's paid off, at which point you own 100% of that asset. Should you choose to sell your home before paying off your mortgage, if there's any money left over after all creditors are paid (including back taxes), it goes to pay off your loan.
Types of mortgages
There are many different types of mortgages. Knowing what they are will help you better understand which type is right for your situation.
Before applying for your first home loan, make sure you have an understanding of what to expect from lenders and what loans might be available to you.
Mortgage terms and conditions
The terms of your mortgage have an enormous impact on how much house you can afford. Most homebuyers focus on payments, but their monthly payment will be largely determined by their interest rate, loan term, and down payment.
The four most common types of mortgages are: fixed-rate loans (FRMs), adjustable-rate loans (ARMs), hybrid ARMs (hybrids), and balloon loans. There are other loan types as well, but these are usually less common.
It’s important to understand exactly what kind of loan you’re getting before signing on that dotted line; they vary in both benefits and drawbacks to homeowners.
What is a Mortgage - The Bottom Line
Mortgages are loans secured by property that lets you buy real estate without having to pay cash. The interest rate on your mortgage loan will be determined by how much money it costs to borrow money, which in turn determines your monthly payment.
The lowest rate available will be based on two main factors: how much money you can put down when purchasing real estate (typically 10 percent) and your credit score.
Mortgages typically take 25-30 years to pay off in full, but they can be shortened or lengthened with an adjustment of payments during those years depending on your personal needs.