What is a Mortgage?

Perhaps back in the day, while throwing some dice and passing around the paper money, you came across the term mortgage. It had something to do with properties and your well-crafted strategy to win the game (creating yet another epic game-night feud).

 

But now you’ve found yourself in a real-world situation, and you’re not sure—what is a mortgage? And do you actually need one to buy a home?

 

Tell me quickly—what is a mortgage?

A mortgage is just a type of loan, like a personal loan or a car loan. However, mortgages are typically used to purchase real estate properties. If you’re interested in buying a $250,000 home and you don’t have $250,000 in cash—chances are, you’ll probably need to take out a mortgage.

 

But taking out a mortgage can seem intimidating at first. In fact, the word mortgage actually means “death pledge.” No worries, though. There’s no actual death involved. The term originally derived from the middle ages (mortgages for properties have been a thing for a pretty long time). It’s a reference to the fact that the mortgage exists until you’ve fulfilled your obligation or the property has been taken through foreclosure.

 

That’s a unique thing about mortgages, when compared to something like a personal loan. If you default on the loan, your lender has the right to take your property. These properties are typically sold so that the lender can get back some or all of the money that was borrowed.

 

What is a good mortgage? Does it exist?

With that death pledge in mind, maybe you’re having second thoughts about taking out a mortgage. That’s fair, but a mortgage isn’t always a bad thing. Most people wouldn’t be able to afford owning their own homes without one. And as long as you make regular, on time payments—having a mortgage can improve your credit score overtime.

 

Historically, though, interest rates on mortgages have not always been good. When modern mortgages rates started being tracked (around the mid-70’s), interest rates were at about seven percent. Over the new several years however, these rates would sky rocket hitting an all time high of 16.63 percent in 1981. These high rates made it impossible for many average people to afford a home.

 

Post 1981, with help from the Federal Reserve and an improving economy, mortgage rates started to decline. And since the pandemic, the US has seen some of the lowest mortgage rates in history—falling bellow 2.6 percent. Low rates are a key component of a good mortgage.

 

What is an adjustable rate mortgage?

An adjustable rate mortgage (ARM) was largely to blame for the housing crash in 2008. This is a type of mortgage that is offered to borrowers with what could be a low starting interest rate. However, these rates can balloon and become much larger overtime. As rates increase, payments become much higher and sometimes, borrowers are no longer able to afford the payments on their homes.

 

Because of this, many modern borrowers prefer to take out what is referred to as a fixed-rate mortgage. These mortgages may have slightly higher interest rates to start out, but the rate is guaranteed for the duration of the loan.

 

 

There is still plenty more to learn if you are trying to buy a home. Like how to get preapproved for a mortgage (this is a smart thing to do since it can improve your negotiating power and help you set a budget). You can also learn which mortgage is right for you and tap into extra resources available to first-time homebuyers.

 

Just remember, while the homebuying process may seem tedious there is a light at the end of the tunnel. And the prospect of becoming a new home owner.

 

Looking for more Foundation tips and learning? Return Home here.

Published 04.21.22

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