What Is a Mortgage Loan Anyway?

It's a question every home buyer asks at one point or another. What is a home mortgage loan and how do I choose the right one? Here's our answer.

Let's start at the beginning. Before you can decide which type of mortgage loan is best for your unique situation, you must first understand what a mortgage is in the first place. So let's kick things off with a basic definition.

Of all the articles and books I've read on the subject of home mortgages, the best definition I've encountered was in a book by Eric Tyson and Ray Brown, entitled Home Buying for Dummies. In their book, the authors gave a great answer to the question: What is a home mortgage loan — a common question among first-time home buyers.

The authors explained that "a mortgage is nothing more than a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home..."

So now when somebody asks you the question: "So what is a mortgage loan anyway?" ... you'll have a good answer for them. You have a certain amount of money. The home costs a certain (larger) amount of money. The home mortgage loan covers the distance between the two.

What are the Parts of a Mortgage Loan?

So now that we have a basic definition behind us, let's talk about the various parts of a home loan and how they interact. Among other things, home mortgages consist of three primary components:

1. The size of the loan (the principal amount)
2. The Interest rate on the loan
3. The length (or "term") of the loan

To further understand what a mortgage loan is let's examine these ingredients in detail:

• The Size of the Mortgage Loan - This refers to how much money the bank loans you for the home. This will depend on your budget, your credit score, and the amount of a down payment you can afford. This "principal" part of your mortgage includes the main amount loaned to you (excluding interest).
• The Interest Rate - When you obtain a mortgage loan, you will be charged interest on top of the principal amount mentioned above. This is a percentage of the principal amount loaned to you. The interest rate you are offered will depend primarily on your credit history and credit score, though other things factor in as well.
• The Term / Length of the Loan - When it comes to mortgage loans the word "term" can mean two things. First of all, the "terms" of your loan are the specific conditions of the loan. In addition, the "term" of your loan can also refer to the length of the loan (how long it takes to pay off). Mortgage terms are usually 15, 20 or 30 years in length. The 30-year, fixed-rate mortgage is one of the most popular loans.

Related Information

What is a mortgage loan and how does it work? You should now be able to answer this question with ease. But your mortgage education doesn't end here. With the amount of money involved in the process, it's important to learn all you can about the subject of home loans before applying for one.

So now that you know what a mortgage is let's move on to some related topics:

• The Various Types of Home Loans
• The Adjustable Rate Mortgage (ARM)
• The Fixed Rate Mortgage
• The Process of Obtaining a Loan
• How to Compare Mortgage Lenders
• The Home Buyer's Guide to Credit

We hope this brief tutorial helps you to better understand what a mortgage is and how it works, and we wish you all the best in your home buying process.