What is Mortgage Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 February 2020
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Mortgage financing is the process of underwriting and extending a home loan or mortgage on commercial property to a qualified applicant. The aim or focus of mortgage financing normally centers around two specific goals. First, the financing seeks to create revenue for the lender. Second, the extension of mortgages allows qualified individuals and business entities to secure properties that can be repaid in terms that are within the ability of the recipient of the loan to pay off in a timely manner.

In order to understand how mortgage financing works, it is important to grasp the idea behind a mortgage. Mortgages are more than just a simple loan. Loans of this type are associated with the acquisition of real estate, either for personal or commercial usage. The terms of the mortgage loan are usually different from a standard bank loan, both in terms of structure and in duration. A mortgage may be written for a period of twenty years or longer, at the discretion of the lender.

In most mortgage financing arrangements, the property that is purchased with the financing is used as collateral for the debt. For the duration of the mortgage, the lender functions as the mortgage holder on the property. Should the owner of the mortgaged property default on the loan, the lender has the right to secure full ownership of the property and offer it for resale to another party.


There are situations where it is possible to obtain mortgage financing when there is already as existing mortgage associated with the property. This is often accomplished by basing the amount of this second mortgage on the equity that the owner has built up in the property, although there are other formulas used in different places around the world. It is also not unusual for real estate laws to require that the holder of the first mortgage agree to the creation of a second mortgage.

As with most types of loans, mortgage financing involves the full repayment of the amount borrowed to acquire the property, plus applicable interest that is applied according to terms outlined in the mortgage agreement. The interest rate may be fixed, meaning it remains the same for the duration of the contract. However, it is also possible to obtain mortgage financing that carries a variable rate of interest. This allows the homeowner to take advantage of any decreases in property interest rates that may take place during the life of the mortgage.



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