Real estate and, by extension, mortgage loans are one of the big drivers of America’s economic engine. Because of their large amounts and volume, real estate finance has a pronounced ripple effect on the entire economy – as we’ve seen with the latest downturn and recession. So what exactly is a mortgage loan?
In essence, a mortgage loan is a type of secured financing that uses real estate as the collateral. Although residential mortgage loans are the most prominent and visible for most consumers, a large portion of the mortgage loan industry actually involves commercial and investment properties.
The mortgage loan’s promissory note is the legal evidence of the loan issued and obligates the borrower to pay the lender in full over the loan’s established term. Through the mortgage deed (which accompanies the promissory note), the lender keeps a legal interest in the property until the loan is retired.
The term mortgage is from the Latin root “mortis” which means death. As the loan is paid off, the loan in essence “dies.” Traditional mortgage loans are fully amortized. This means that the loan balance (along with all interest charges due) is gradually paid off over a predetermined period of time.
As each mortgage payment is made, a portion of the payment is applied toward principal and interest. Interest is calculated based upon the interest rate and remaining balance of the mortgage. At the beginning of a mortgage, an overwhelming portion of each monthly payment is dedicated to interest charges. By comparison, at the end of the mortgage term, the overwhelming portion of each monthly payment goes toward paying off the principal balance.
Borrowers may obtain a mortgage loan by using the services of a mortgage broker or by applying directly with a mortgage lender. A mortgage broker does not issue a mortgage but attempts to find the most attractive mortgage option from different mortgage companies the mortgage broker represents. A mortgage broker will prepare the mortgage loan application on behalf of the borrower for submission to multiple mortgage companies. A direct lender works with the borrower directly when processing, underwriting and approving a mortgage application.
Mortgage loans are typically offered in loan terms stretching from five years to 30 years, with some mortgage loan terms reaching 40 years. The actual loan term can be anywhere in the 5- to 30-year range, though some lenders may restrict terms to five-year increments (such as 5-, 10-, 15-, 20-, 25- or 30-year loans). Mortgage loans can have interest rates that are fixed throughout the entire term of the mortgage, or mortgages can have adjustable interest rates that can move up or down throughout the life of the loan.
Mortgage competition in the United States is keen and lenders compete with one another to offer the best mortgage terms to their clients. There are typically two types of consumer mortgage loans in the market today, conventional loans and government-backed mortgages. When multiple lenders are competing for your business all with the same set of mortgage programs, it pays to shop around for the best deal.
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