Mortgage

What Is a Mortgage?

A mortgage is a loan secured by real estate, most often a house, condo, or plot of land. The buyer receives the funds needed to purchase the property and agrees to repay them over a set period, usually in regular monthly installments. Because the property secures the loan, the lender holds a legal claim on it. If the borrower fails to keep up with payments, the lender can start a process called foreclosure to recover the debt by selling the home.

How a Mortgage Works

Each monthly payment typically covers two parts: interest, which is the cost of borrowing, and principal, which reduces the amount owed. In the early years of a standard loan, a larger share of each payment goes toward interest. Over time, the principal portion grows and the balance falls. Many borrowers also pay property taxes and homeowners insurance through an escrow account, which is managed by the lender or loan servicer, so these costs are included in the monthly payment.

Mortgages come in different structures. A fixed-rate mortgage keeps the same interest rate for the entire term, so the principal and interest payment does not change. An adjustable-rate mortgage starts with a fixed period and then resets its rate periodically based on a benchmark index, which can raise or lower payments.

Why It Matters to Investors

Mortgages are central to the housing market and to the broader financial system. Mortgage lending affects home prices, construction activity, and the health of banks and other lenders. Many mortgages are also bundled and sold to investors as mortgage-backed securities, so the performance of home loans can influence bond markets. Mortgage interest rates tend to move with broader interest rate conditions, which is why they are closely watched by economists and market participants.

For an individual, a mortgage is a long-term commitment. The total interest paid over the life of the loan can be substantial, and the terms of the loan, including the rate, length, and fees, shape how much the home ultimately costs.