Mortgage

Mortgage summary:

• A mortgage is a loan guaranteed by real estate. 

• If you fail to repay a mortgage, you could lose the property.

• Once the loan is fully repaid, the lender releases its legal claim to the property and grants clear ownership.

Mortgage definition and meaning

The term mortgage has two meanings. Most commonly, it's a loan secured by real estate. This means the lender can take back the property and sell it if the borrower defaults or falls behind on their loan payments. Mortgage can also mean the document that gives a lender a legal claim to your property as a guarantee for a loan. This claim is called a lien. When the loan has been repaid, the lender releases the lien. 

Key concept: A mortgage is a secured loan used to purchase a home, refinance an existing home loan, or borrow against your home equity.

More about mortgages

A mortgage is a special loan with unique features:

• Mortgages are secured loans, guaranteed by real estate. That's what makes them different from other loans.

• When you use a mortgage to buy a home, the lender places a lien on the property's title. This is a public record of the lender's legal interest in the property.

• After you pay off the mortgage, the lender releases its lien, giving you clear title to your home. 

• If you don't pay your mortgage as agreed, the lender could take the property, sell it, and recover its money. This is called foreclosure.

• Home equity loans and lines of credit are also mortgages, secured by real estate. You could lose your property to foreclosure if you don't make payments on a home equity loan. 

• If you have a mortgage and better terms become available, like a lower interest rate, you could replace it with a new mortgage. This is called a mortgage refinance. 

How mortgages work

Loans with real estate as collateral are less risky for lenders than unsecured loans or loans backed by personal property like cars. The lower risk allows lenders to offer lower interest rates for mortgages compared to other types of financing. 

Mortgages are a big deal. Loan amounts and payments tend to be higher, and losing a home to foreclosure can be disastrous for borrowers. There are many consumer protections for mortgage borrowers, as well as a lot of paperwork to read and understand.

Lenders have to disclose mortgage costs, payments, terms, and whether the interest rate can change in the future. They must verify your income, assets, credit, and other factors carefully. They also evaluate the property. Because of the added legal and underwriting requirements, it usually takes longer to get a mortgage than other types of loans. 

The mortgage process

Here's how mortgages work for most people. 

• Loan application. You apply for a mortgage in person, over the phone, or online. You provide financial details, your credit history, and details about the property.

• Underwriting. Your application and documents will be evaluated first by software, and then by a human underwriter. Some lenders advertise a fully digital mortgage, but you should expect a human expert to have some input. The lender may send a human appraiser to determine the current value of the property. In some cases, this can also be done by using technology. During all of this, you may be asked for more information.

• Loan approval. If you and the property meet the lender's guidelines, you'll receive loan approval. You'll set up a time to sign your final documents and close (finalize) the loan.

• Closing. You'll sign a final set of legal documents and pay any remaining closing costs that are your responsibility. If you're purchasing a home, you'll get your keys. If you’re refinancing, the old loan will be paid off and you'll have a new loan. If you're getting a home equity loan, you'll receive money or access to a line of credit. 

• Monthly payments. You'll make regular monthly payments until your balance is zero.

• Reconveyance. Once the loan is paid off, the lender releases its lien and you own the property outright.