What is Mortgage?

A mortgage is a loan used to purchase or maintain real estate. The borrower agrees to make regular payments (typically over 15 or 30 years) split between paying down the principal and covering interest. The property serves as collateral, meaning that if the borrower defaults on the loan, the lender holds the legal right to foreclose and sell the property to recover the unpaid balance.

Under federal guidelines set by the Consumer Financial Protection Bureau (CFPB), lenders must verify a borrower's "ability to repay" using documented income, assets, credit history, and liabilities before approving the loan. A mortgage transaction actually consists of two core legal documents: the promissory note, which is the borrower's personal obligation to repay the debt, and the security instrument (the mortgage or deed of trust), which establishes the lien on the property title and allows the lender to foreclose if the note is breached.

Most homeowners pay their mortgage through a monthly payment structured as PITI, which stands for Principal, Interest, Taxes, and Insurance. While the principal and interest portions go directly toward amortizing the loan balance and paying the lender's fee, property taxes and homeowner's insurance premiums are typically collected monthly by the mortgage servicer and held in an escrow account, from which the servicer pays the county assessor and insurance company directly on the borrower's behalf.

Choosing a mortgage involves evaluating interest rates, amortization schedules, and structures (such as fixed-rate vs. adjustable-rate mortgages). Over a standard 30-year term, the compounding interest can easily exceed the original purchase price of the home, which is why understanding amortization and prepayment strategies is essential for building household net worth.