What is a mortgage?

A mortgage is a loan designed specifically for people who need to finance the purchase of a home. Because houses are so expensive, most people can’t afford to pay for the entire cost upfront. Mortgages help people pay for their houses in relatively small payments, over time. The loan repayment is stretched over a period of many years since the amount of money involved tends to be rather high.

Any mortgage has two basic components: the principal and interest. The principal is the amount of your original loan. For instance, for a $200,000 house, you might pay a $20,000 down payment and obtain a mortgage for the remaining $180,000. That amount, $180,000, would be your principal.

The interest represents the amount of money that you pay your lender over and above the principal. In other words, lenders make profit from the interest on the loan; that is what makes it worthwhile for them to lend money. Interest rates vary considerably depending on the type of mortgage you obtain, the term of the mortgage, market interest rates, and other considerations.

When you make a mortgage payment, the money goes toward paying both the principal and the interest. Sometimes mortgage payments include other fees, like taxes and insurance.

If you, as a borrower, do not make regular payments on your mortgage, you might lose the house. The lender has the right to repossess it, despite past payments that you might have made. This policy helps to make sure that borrowers honor the agreements they made and helps lower the risk of lenders losing their money.