The term “mortgage” gets thrown around a lot, but what exactly does it refer to and how does this type of loan work? Here’s everything you need to know about this often critical part of the home-buying process.
What is a mortgage exactly?
Put simply, a mortgage is a loan used to buy a house (or another type of real estate) or land on which to build a property. The lender agrees to give the borrower the money needed to make the home purchase, and the borrower agrees to pay back that money over a set period of time. During this period, known as the loan’s term, the borrower makes regular monthly payments on both the amount they borrowed (known as the principal) and the interest charged for taking out the loan. Other costs are often added to monthly mortgage payments, such as property taxes, homeowner’s insurance, and if applicable, private mortgage insurance, explains the Consumer Finance Protection Bureau (CFPB).
To qualify for a mortgage, you must meet the lender’s requirements and go through an intensive process known as underwriting so the lender can assess their risk. “​​If the risk is deemed too high, an underwriter may refuse coverage,” explains Investopedia. But if you’re approved, you will agree to certain terms, including the interest rate you’ll pay on the money borrowed and how long you’ll have to pay back the loan.

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