Mortgage pertains to the debt instrument that is used to buy some real estate property. A person or entity that wants to buy real estate assets offers collateral in exchange for a loan and make payments based on the defined payment schedules.

Mortgages are used to purchase real estate assets when the buyer cannot afford to pay the entire value of the asset being purchased. The buyer pays the principal amount plus interest over a specified number of years until the buyer has fully paid the property. The buyer then has the clear ownership of the said property.

A buyer who fails to pay the loan in a timely manner may see the property foreclosed by a bank.

Mortgage explained

For residential mortgages, the person who is buying a house will pledge the house being purchased to the bank. The bank in return can get the full ownership of the house should the buyer fail to pay the mortgage payments.

Foreclosure means that the bank can evict the buyer from the home and eventually sell the property to recover the cost of lending the money to the buyer. Each state has its rules about foreclosure as some states require that the banks get a court order before foreclosing the property.

There are different forms of mortgages. For one, there is a fixed-rate mortgage where the buyer who is also the borrower will have to pay a fixed interest rate for the entire duration of the loan. This means that the buyer will pay the same amount to the money starting from the first payment until the last payment. This type of mortgage is also called traditional mortgage.

The adjustable-rate mortgage is another type of mortgage where the buyer will pay a fixed interest rate for a specified initial period, and eventually pay the prevailing interest rate in the market.