An Introduction to Mortgage Loans
A mortgage loan—most commonly known as, simply, a mortgage—is used to raise and deliver funds for the purchase of real estate. This is done by putting a lien on a property—a security interest to secure the payment of a debt. The loan is secured on the borrower’s property through a mortgage origination—a specialized subset of loan origination in which the lender works with the borrower to complete the mortgage transaction.
A mortgage borrower can be an individual mortgaging their home or a business mortgaging commercial property. In most cases, the lender is a financial institution, such as a bank, a credit union, or a building society. Over the past century, the mortgage loan has grown in popularity—few individuals have the savings or liquid fund available to purchase property without financial assistance. This popularity has led to the development of mortgage markets worldwide.
There are two basic types of mortgage loans: a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM). In a standard fixed-rate mortgage, the rate of interest accumulation remains fixed for the duration of the loan. In an adjustable-rate mortgage, this rate is fixed for a period of time, but will then shift periodically according to some market index.
Several factors contribute to a choice in the most appropriate loan. For example, the interest rate itself is an essential characteristic to consider when choosing your loan. Moreover, the term of the mortgage will often determine whether fixed- or adjustable-rate is best for your transaction. Payment amount and frequency, as well as prepayment amount, should also be considered.
Rachel Richardson