mortgage loan

What is a Mortgage?

mortgage loan

Mortgage is a type of loan with which you can buy a house or property. These loans can be taken from banks and other financial institutions. The house or property you will purchase will be the collateral of the mortgage; you will be able to enjoy full ownership of the house or property after paying all the arrears. But if you fail to repay the loan, the bank or financial institution will foreclose on your home.

How Does a Mortgage Work?

You already know that a mortgage is a type of loan with which the borrower can buy a house or property. There are primary two components to a mortgage, principal and interest.

The amount you borrow from a bank or financial institution to buy a home is the principal. For example, you want to buy a house that costs $200,000. That’s why you borrow $100,000 from the bank; this $100,000 is the principal.

Interest is the cost charged by the mortgage lender that borrowers have to pay off with the principal. The current market rates and the borrower’s credit score determine the interest rate of mortgage. Those who have a very good credit score can get a mortgage at a low interest rate and the interest rate can go up if there are some red flags on the borrower’s credit report.

The lender will ask borrower to back the mortgage at regular intervals, usually on a monthly basis. However, it must depend on the decision of the mortgage lender.

Who is Eligible for a Mortgage Loan?

Anyone can apply for a mortgage loan. However, in order to get a mortgage loan, some eligibility requirements have to be met.  Among these requirements, credit score is the most crucial factor. A good credit score means you have a stable and reliable source of income, so you can easily get a mortgage loan. If you are seeking for FHA loans you must have a minimum score of 580. If you want traditional loans then you require a minimum score of 620.

It is seen that people apply for a mortgage loan even if they can afford to buy a house. A big reason for this is to invest some funds in a profitable sector. Like someone invests in stocks, someone invests in bonds or any other sector. I always look at it in a positive mind. But before investing, you must have a good knowledge of investment strategies.

Loan vs. Mortgage

A loan is a transaction between a borrower and a lender where the borrower receives a certain amount of money from the lender and repays that money within a fixed period of time.

A mortgage is a type of loan that is used to purchase assets. Mortgage loans cannot be used to meet monetary requirements.

A mortgage is a secured loan, where the borrower keeps his home with the lender as collateral. If the borrower fails to repay the mortgage loan, the lender will take the house into his custody. On the other hand, conventional loan or personal loan is usually unsecured.

Components of Mortgage Payment

According to the mortgage agreement, the borrower has to pay a certain amount as installment every month. There are several parts to this mortgage payment that are discussed below:

Principal and interest

Above I have already discussed the principal and interest so I am not discussing this topic in detail anymore. But I want to add some things. Most mortgage lenders prefer a 20% down payment. If your home is worth $200,000, your down payment would be $40,000.

Then your principal would be $160,000. Your interest will be determined on the basis of principal amount.

Property taxes

The tax levied on the property has to be paid by the borrower. In this case, the mortgage lender will not be responsible for paying any tax.


Homeowner’s insurance and mortgage insurance are also the part of the mortgage. Homeowner’s insurance is the obligation of the mortgage lender to compensate for any damage to the property of the borrower. On the other hand, If a customer’s down payment is less than 20%, the lender charges a private mortgage insurance fee on the customer. That means borrower’s mortgage payment may include private mortgage insurance fee.

Types of Mortgage

There are several types of mortgages available today. In the below I will discuss about some of the different types of mortgages:

Fixed-rate mortgage

As you can see from the name, the interest rate in this mortgage is absolutely fixed. That means there will be no change in the interest rate for the entire term of the loan. You will continue to pay interest at the same rate. You have no worries if the market rate goes up in the future because it will have no effect on you.

The time frame of fixed-rate mortgages is usually for 15, 20 or 30 years. The most popular of these is the 30-year mortgage loan. Because if the term is short then the amount of monthly mortgage payment of customers is much higher. And the longer the term, the lower the mortgage monthly payment. But it is also true that the later the customer pays the loan, the more interest charge he will pay.

One of the great benefits of a fixed-rate mortgage is that customers can count their monthly mortgage payments in advance, so they can create a personal budget accordingly.

Adjustable-Rate Mortgages

In adjustable-rate mortgages, interest rate may change over the life of the loan. Interest rates may change due to rising market rates and other financial factors. If the interest rate goes up, the customer must pay it. This can increase the amount of the borrower’s monthly mortgage payment.

The interest rate is adjusted by reviewing it once or twice a year. Again adjustments may be made once in a few years. The most popular adjustable-rate mortgage is 5/1 ARM. Here 5 means that the interest rate will remain fixed for the initial five years of interest payment and the interest rate will be adjusted once a year thereafter. Interest rates will be adjusted based on the standard financial index established by the Federal Reserve or the Secured Overnight Financing Rate (SOFR).

The disadvantage of ARM is that the borrowers cannot gauge their expenses which make it difficult for them to create a monthly budget. ARM is popular with many people because at first ARM’s interest rates are lower than fixed-rate mortgages. But the risk is that the interest rate can soar at any time during the life cycle of the loan. This may put the borrower at risk.

FHA mortgage

FHA mortgages are very popular with the common people. This is because the FHA mortgage is government-backed mortgages. The Federal Housing Administration takes responsibility for this mortgage. If for any reason the borrower fails to pay the loan, the Federal Housing Administration will reimburse lenders. This curbs the risk to the lender.

Borrowers can get FHA mortgage with a very low credit score. For example, if borrowers have a credit score of only 580, they will still be considered eligible for this loan. The down payment of this loan is also very low. It is possible to get FHA mortgage with just 3.5% down payment.

Conventional Loans

Conventional loans are not as popular as FHA loans, but they are popular with many new borrowers. Conventional loans are not backed or guaranteed by the federal government, but are offered to customers by two government-sponsored enterprises, Fannie Mae and Freddie Mac.

You can also get conventional loan with as little as 3% down payments. However, if you make a down payment below 20%, you will have to pay private mortgage insurance fee.

USDA Loans

USDA loans have been arranged so that the people living in the villages can build houses. Getting this loan is relatively easy. Because you can get USDA loans with zero percent down payment. However, there is a condition that your income cannot exceed 115% of the median income in the area where you live. If your income exceeded the limit then your application will not be considered.

USDA loans although allocated for rural residents, suburban resident will also be considered for USDA Loans.

VA mortgage

The U.S. Department of Veterans Affairs is the guarantor of VA mortgage. Veterans, service members and qualified military spouses are considered for this loan.

VA mortgage is available for very low down. This loan is available even at zero percent down. Since the government agency guarantees VA mortgage, lenders do not have to worry too much about credit score or down payment.

Balloon mortgage

Balloon mortgage monthly payments are very low at the initial period. But after the end of the loan, the borrower has to repay a lump sum payment—or “balloon payment” to the lender.

Balloon mortgages are usually fixed rates and it comes with short period of time, such as 5, 7 or 10 years. The Balloon mortgage is very attractive to those who plan to sell their home or have the desire to refinance before the loan term ends.

Mortgage Terminology

There are some basic mortgage terms. A mortgage borrower should have knowledge about these terms.


Amortization is the paying off a certain amount of loan installment at regular intervals over the period of loan term. One part of this payment is the principal and the other part is the interest. A mortgage loan might amortize over a 15, 20 or 30 year term.


APR stands for Annual Percentage Rate. It is the cost of borrowing money for a mortgage. APR includes the interest rate, discount points and other fees that are associated with the loan.

APR tends to be higher than the interest rate and through this you will get an idea about the actual cost of the loan.

Promissory Note

Promissory Note is also called mortgage Note. This note comes with details everything about debt repayment. Promissory Note is a written agreement by which the borrower promises to repay the loan within the specified period. Promissory Note includes:

  • The rate of interest and the type of interest (adjustable or fixed).
  • Loan repayment deadline.
  • Rules for repaying loans

The lender returns this note to the borrower when the borrower upholds the responsibilities outlined in the promissory note.


The amount that a home buyer pays upfront instantly at the time of purchase home is called down payment. The rest of the price of home is a mortgage. Most lenders prefer a 20% down payment. However, some lenders agree to offer a mortgage on a less than 20% down payment if the borrower has a good credit score.

How to Find the Best Mortgage

This is an important question for a mortgage borrower. Because if you can’t identify the perfect mortgage for you then you may face financial loss or you may be deprived of good opportunities.

As you can see from the article above, mortgage products are almost identical. But the requirements of the lenders are different. Some agree to pay a mortgage less than 20% down, while others want a down payment of more than 20%. Some mortgages are also available at zero percent down. Some mortgage lenders demand good credit score to disburse loan, but mortgages are also available with low credit scores.

There are a number of factors to consider when determining the most suitable mortgage for you, such as credit history and scores, income, financial goals, and employment. You need to choose the best mortgage by analyzing these factors deeply.

You can do some experiments to find the best mortgage. Such as taking mortgage from multiple lenders at the same time. Then after a few days of use you would understand which mortgage is most suitable for you.


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