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What Is a Mortgage Loan?

Mortgage loans allow people to purchase a home without paying the full price up front.
Article Details
  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 April 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Even the wisest savers are generally not able to pay the full price of a house out of pocket, and so must get a mortgage loan to secure the property. A mortgage loan is a common way to buy property without paying the full value of the home or land upfront. Most mortgage loans are an agreement that the buyer will pay the seller the full price of the property, plus interest, in regular payments over a set time period.

In most loan structures, the buyer must provide collateral: assets that the buyer pledges to the seller in the case that he or she cannot make payments. In a mortgage loan, the deed to the house is generally used as the collateral. If the buyer defaults on his or her payments, the seller can seize the house in what is generally known as a foreclosure. If the house must then be sold to pay off the debt, a foreclosed buyer may be responsible to make up any difference between the amount of the sale and the amount owed.

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A mortgage loan may be described by how long it will take to pay it off, such as a “30 year mortgage.” Longer-term mortgages may be preferable to those who plan to stay at the property for a long time and who can better afford lower payments spread over a longer time period. It is important to remember, however, that interest accrues over time, making the total amount of the loan paid often much higher than the initial price of the house or land. Short term mortgages may be preferable for those who can afford higher payments and use real estate as an investment, for instance, those who plan to remodel the house and sell it for more money eventually.

Not all people can qualify for a mortgage loan. Most lending companies take into consideration a debt-to-income ratio when deciding whether to allow a borrower to get a loan. Even people with good jobs and enough money to make the payments may be rejected if they carry a high burden of debt, such as student loans or high credit card debt. If a buyer can afford to make a higher-than-average down payment, thus lowering the amount of the loan needed, the debt-to-income consideration may be easier to get around.

Mortgages often contain unexpected additional fees that can confuse buyers and can do a lot of financial harm. In addition to the amount of the monthly payment and basic interest, buyers may be responsible for origination fees, points, and prepaid mortgage interest. These additional costs may not be included in the published monthly total, but can be figured out by examining the annual percentage rate or APR. Unlike the basic interest rate, the APR factors in additional fees and will let the buyer know what he or she will actually pay over a year. Although instinct may tell a buyer to go with the mortgage loan that offers the lowest interest rate, looking at the APR will usually give a better idea of the better deal.

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