What is a Mortgage? Definition & Meaning of Mortgage

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Hi Friends, Let’s learn today What is a mortgage, the type of mortgage loan & the definition of a mortgage.

Definition and Meaning of Mortgage – Purchasing real estate can be very expensive, so most people avail of home loans. The mortgage isn’t the loan itself. It actually refers to the agreement within such loan which states that your lender can seize or foreclose on the property given the scenario that you fail to pay your debts as agreed.

Since contracts for home loans are required to be in writing, the mortgage is also the document that gives the person or entity you owe the right to do so. This serves as collateral or protection against the possibility of you not settling such a loan.

Mortgage Simple Definition: A mortgage loan is also like any other loan which we take against any kind of security. That is, if we take a loan by mortgaging the house or property, then it is called a mortgage loan.

This loan is taken to buy or build a new house. The loan amount depends on its eligibility and the loan policy of the bank. A mortgage is also commonly known as a loan against property.

Types of Mortgage Loans

According to Flexibility of Interest Rate

Fixed Rate Mortgage Loan – As the name suggests, a debtor will have to pay a fixed amount of money periodically until the entire principal amount has been paid. For instance, you may be required to pay an unchanging amount of $1000 every month for 30 years.

The interest rate will also be the same for the entire term. This type of mortgage loan is recommended for first-time debtors and those who can handle long-term loans due to the stability of the periodic payments.

Adjustable Rate Mortgage Loan – In contrast with the first type, the interest rate for the payment of a loan is bound to change in the future. Suppose you availed of 5/1 Adjustable Rate Mortgage Loan, the first digit stands for how long will the interest rate be temporarily fixed (five years) and the second would represent the length of the interval between every “adjustment” (1 year).

Its initial required payment is lower than that of the previous type, but the debtor is only aware of when the interest rate will change but not for how much.

According to Inclusion of Source

Conventional Mortgage Loan – This type is not covered by any insurance from the federal government and is offered entirely by the private sector. This saves the costs from compulsory payment of mortgage insurance provided that you settle a down payment of 20% or higher. Initial disbursement of anything less will then require you to avail of Private Mortgage Insurance.

Government Insured Mortgage Loan – Conversely, this type of mortgage loan is provided and secured by the government itself. Government entities that offer such include the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture.

According to Size

Conforming Mortgage Loan – As implied by its name, these types of loans must conform to pre-determined criteria that limit the amount that could be borrowed by a particular applicant. Such standard is based on the guidelines of Fannie Mae or Freddie Mac – both government-controlled corporations that purchase loans from creditors and sell them to interested investors.

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Jumbo Mortgage Loan – On the other hand, this type significantly exceeds the set limitations of the previous type. Alongside a higher interest rate and required amount of down payment, a debtor can only be granted a jumbo mortgage loan if he has an impressive credit record.

Features of Mortgage Loan

This loan is given to the borrower. Usually, 80 percent of the property value is given as a loan. In some cases, this amount reaches up to 85-90 percent.

1. Repayment Period: Talking about the repayment period, it is known as the term of the loan. During this time the loan is repaid through EMI.

2. Interest Rate: The interest rate charged by housing finance companies on loans is counted as the interest rate.

3. Reducing Balance: The loan balance keeps on decreasing daily, monthly, and annually. The system of decreasing every year balance is almost over and now the balance decreases only on a monthly basis.

4. Down payment: To avail a home loan, the borrower has to pay a certain amount, which is called the down payment. The down payment can range from 10 percent to 20 percent.

5. Prepayment: If the customer wishes, he can prepay the loan by prepaying it. Through prepayment, the customer can save interest by repaying the loan before the due date. Customers have the option of part prepayment or full prepayment. Many housing finance companies also levy a nominal penalty on the prepayment.

6. Fees: This includes all other charges levied by housing finance companies. These charges can be collected at the time of filing the loan application. This includes administration fees, verification fees, legal charges, technical charges, etc.

7. Loan Repayment: The borrower has to pay monthly EMIs during the tenure of the loan. This EMI includes interest and principal repayment. In the initial few years, the interest portion is higher as compared to the EMI and later the EMI increases the principal amount.


It is my endeavor that you got complete information in this article about What is a Mortgage, Mortgage simple definition & types of the mortgage.

Today you have learned what is a Mortgage loan.

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