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What is a mortgage?
Over here at The Truth About Mortgage, this is always the word of the day, as you might have guessed. Fortunately, the definition of mortgage has a somewhat interesting origin.
You’ve undoubtedly heard the word “mortgage” thrown around a million times. But you may not know that in the literal sense, it is defined as a “death pledge” in the French language.
Ironically, the French don’t actually use the word themselves (they use hypothèque, while Spanish speakers use the similar word hipoteca).
Broken down, the mort part (pronounced more) means death and the gaging part (pronounced gah) means pledge.
This pledge dies (is terminated) when the mortgage is either paid off in full or the property is repossessed (foreclosed) by the bank if not paid as agreed (borrower defaults).
So that’s the literal definition of a mortgage; now let’s look at the real-world application.
The Many Different Ways to Say Mortgage
A mortgage can be referred to in a variety of different ways, with the most common being a “home loan.”
Some may refer to a mortgage as a “lien,” which represents a security interest by a lender on a piece of property. Whatever is left over from the original loan amount is referred to as the existing lien.
Others might refer to the mortgage as a trust deed, or deed of trust, which is a legal document that it used in some states to outline the terms of the agreement between the homeowner and the lender.
You can also use the word as a transitive verb to describe the conveyance of property, which is the legal process of transferring ownership of real property from one owner to another.
- A mortgage is simply a loan used to finance real property
- Otherwise known as a house, condo, or townhome
- Good for those who can’t afford to buy the property with cash (or prefer not to)
- You can get one from the bank, a credit union, a mortgage lender, or a broker
Now that we’ve discussed the meaning of a mortgage, let’s move on to how mortgages work.
Regardless of the many terms, definitions, and variations, a mortgage is essentially an agreement between a bank and a borrower to lend money in exchange for a piece of property.
By property, I mean residential real estate, such as a house, condo, townhouse, etc. It’s a fairly simple concept.
Instead of buying a home with cash, which most of us can’t manage due to the outsized purchase price, you take out a mortgage with a bank and repay it over a long period of time, typically 30 years.
The lengthy term of a home loan allows payments (and home ownership) to be affordable. If mortgages only lasted 5-10 years, the monthly payments would be sky-high. And surely home prices would fall.
The Mortgage Loan Process Is Very Involved
In any case, you must go through the mortgage qualification process to get approved, but it’s not a guarantee everyone will be granted a mortgage.
A mortgage underwriter will decide your fate and could deny you for any number of reasons, including spotty credit history, bad credit, expensive student loans, and just plain not being able to afford the monthly mortgage payment.
This is why a mortgage pre-approval is important, as is the use of an affordability calculator to determine how much mortgage you can take on before you begin comparing lenders and starting the underwriting process.
Generally, you must also provide a down payment for a portion of the sales price at the time of purchase, such as 3-20% depending on the loan type, though zero down options are also available if you qualify.
Your down payment will determine your loan-to-value ratio, which is an important factor when it comes to your mortgage rate.