What Is a Mortgage? Types, How They Work

What Is a Mortgage? Types, How They Work

A mortgage refers to a particular type of loan which is given specifically for the purpose of purchasing a home, plot of land, or other type of real estate. Through this type of loan, borrowers can secure a property without having to pay the entire cost upfront. Mortgages are available in different forms and as such a borrower must check out various lenders and compare different types of mortgages to assess which is the most suitable option for them. In this article  we will explore everything there is to know about mortgages.



A mortgage is typically a type of fixed loan which the lender offers to the borrower upon the promise of paying back the principal amount along with interest. The rate of interest can vary depending upon the borrower’s credit score, among other factors. Once the loan is given out, the borrower has the duty to start repaying it back. The payment is divided into monthly payment chunks which consist of a portion of the principal amount and the interest.

However, in order to secure the loan amount, the borrower must fulfill certain eligibility criteria including basic credit score cutoff, down payments, and more. The exact requirements can vary from one lender to another, and can even vary for different borrowers.

Lenders can offer different conditions for granting the loan based on the creditworthiness as well as the needs of each client. When the mortgage is approved, the property itself, for which the loan is being requested, serves as the collateral. This means that if the borrower fails to repay the loan, or defaults, the lender can possess the property to satisfy the loan repayment. The typical term for mortgage repayment can range from about 15 years to 30 years.


Types of Mortgage

Mortgages can be of various kinds, each of them ranging for different time periods. A borrower can seek a short-term mortgage which lasts for about five years, to something that goes on for as long as 40 years or even more. The longer the duration of the mortgage, the lower the monthly payments will be, however, the overall interest rate will increase, which will impact the total cost of the mortgage, meaning that the borrower pays significantly more.

Some of the most commonly chosen mortgage types include:

  • Fixed Rate Mortgages: This is the most popular kind of mortgage chosen by most borrowers. The main advantage of a fixed rate mortgage is that for the entirety of the loan term, the rate of interest remains the same. This in turn means that the monthly payments also remain the same throughout the payment period which allows the borrowers to better plan their finances and budget for the entire duration while their mortgage lasts.

A fixed rate mortgage is known as a traditional type of mortgage, and is quite beneficial for planning other big expenses and can also provide greater clarity when trying to secure other kinds of loans for various purposes.

  • Adjustable Rate Mortgage: The adjustable rate mortgage (ARM) is another common type of mortgage option chosen by some people. The way this type of mortgage works is by providing a fixed rate of interest for a short term during the mortgage period, and then subjecting it to change periodically based on current interest rates.

A positive about this type of mortgage is that during the initial term when the rate of interest is fixed, it is typically lower than the prevailing market rate.

Also read: Is a Personal Loan a Good Choice for a Student?

This means that during this time, the borrower can save some amount on the interest levied.

However, when the rate of interest increases, the increment can be significant if the prevailing market rate is high. As such, the borrower can end up paying more in the long term if they choose this type of loan instead of a fixed term mortgage.


How Mortgages Work

Mortgages work in a very simple way. The borrower gets money from the lender to pay for the property, and repays the lender in monthly payments. If they fail to make the payments, the lender can foreclose the property, and in case the borrowers are living in it, they can evict them and sell the property to make up the portion of money that they need to be returned.

In order to get a mortgage from a lender, a borrower needs to approach them, and fill in the application. The borrowers can choose to file the application with multiple lenders in order to understand the diverse offerings of each of the lenders.

During the application submission, the lenders can ask for financial proofs like bank statements, investment statements, tax returns, proof of income and employment, etc, to assess whether or not the borrower is capable of repaying the loan or not. In addition to these documents, they would also run a credit check for the borrower to assess their creditworthiness.

The process further includes a comprehensive underwriting procedure, only upon the successful completion of which does the closing phase commence.

Also read: What is a Mortgage Loan and what different Types of Mortgage Loans?

In the mortgage closing phase, the lender and borrower iron out the terms and details of the mortgage loan to reach an agreement. To close, the borrower needs to make the downpayment to the lender.

After this process is completed, the seller of the property transfers the ownership onto the buyer. During the transference process, the buyer offers the seller an agreed upon sum to close the deal. The lender can also charge an origination fee during the start of the mortgage period which the borrower would have to pay at the time.

Getting a mortgage is one of the most straightforward ways to get a loan to purchase a property. With a number of lenders in the market, borrowers can choose the most ideally suited lender for their needs by comparing the various options at their disposal. Banks, credit unions, and online lenders, all offer mortgage packages, and it is up to the borrower to select the ideal option for their needs. Following a thorough approval procedure, the mortgage deal can be finalized and the property can be effectively purchased.