Financial Dictionary -> Mortgages -> Mortgage

There are many types of loans for various specific purposes, but in its basic form a loan is when a lender (for example a bank) lends a borrower some money, which they have to pay back over a pre agreed period with an interest rate. A mortgage is a loan like any other loan but is specific to the purchase of a house or other property. Mortgages are very common and not a great percentage of people can afford to buy a house outright.

There are two main types of mortgage, which refer to their interest rates (i.e. the percentage of the loan that is paid on top, as a fee for being allowed to borrow the money). Firstly there is a Fixed Mortgage Rate where the interest rate does not fluctuate and remains the same throughout the term of the loan.

Secondly is an Adjustable Rate Mortgage, which has a floating or fluctuating interest rate which can change a lot of the terms of the loan. The interest rate is based on interest rates in general and various other indices, including the Cost of Funds Index.

Fixed Rate Mortgages are common when interest rates are low, in hope of saving money later on if interest rates rise. If interest rates are high it is common to use an Adjustable Rate Mortgage in hope that rates decrease of the term of the loan.

Generally a mortgage is set for monthly repayment over a number of years. The common terms are either 15 or 30, although they can vary in between those numbers. Some lenders allow the possibility to pay off a loan early with an added fee on top to recoup potentially lost interest rate profit.

If somebody breaks the terms of a mortgage, including failing to make monthly payments the mortgage "defaults" and the lender can take the borrower to court to go through the foreclosure process. This forces the owner to sell the property in order to make the payment. Any surplus equity is obviously kept by the owner.

It is possible to take on a previous owner's mortgage, which is known as an Assumable Mortgage.