Mortgage. What is it, and How Does it Work?


A mortgage is a loan for buying real estate. This is a long-term loan in which the acquired property acts as collateral. When applying for a mortgage, the borrowers must ensure a high credit score and sufficient funds for the down payment.

Mortgage applications go through a rigorous underwriting process before they reach the closing phase.

Mortgage types

Mortgages can have different terms. The most common are mortgages for 15 years and 30 years. However, there are mortgages for five years and 40 years or more.

In addition, there are federal and private mortgages. Federal loans include Federal Housing Administration (FHA) loans, United States Department of Agriculture (USDA) loans, and United States Department of Veterans Affairs (VA) loans.

In addition, there are fixed-rate, adjustable-rate, interest-only mortgages, and reverse mortgages.

Fixed-rate mortgages are commonly referred to as standard mortgages and are also known as traditional mortgages. In this case, the interest rate remains the same throughout the entire time the loan is repaid.

An adjustable-rate mortgage means that the interest rate is fixed for the initial term and can change. Most often, the initial interest rate is below the market rate, which makes such a loan profitable in the short term. However, ARMs usually have caps or restrictions on how much the interest rate can rise each time it is adjusted and generally over the life of the loan.

Interest-only loans represent the type of loan in which the borrower pays only interest for a long period and pays the entire principal amount at the end.

Reverse mortgages are for homeowners over 62 and older. With its help, the borrower can convert part of the capital of his home into cash. The borrower takes out a loan against the house's value and receives the money as a lump sum, a fixed monthly payment, or a line of credit of their choice. The entire balance of the loan is payable when the borrower dies, moves away permanently, or sells the house.