What is a mortgage?

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

A mortgage is the sole reason that people without hundreds of thousands of dollars at the ready can buy houses, and it’s a relatively recent invention — prior to the Great Depression, those who wanted to buy a house would be required to put at least 50% down in cash. More technically, a mortgage is a loan provided by a bank or another kind of creditor using a property as collateral — meaning that until the loan is entirely paid off, your creditor has a right to take possession of the property should you default on the loan.

There’s a dizzying variety of mortgages available — jumbo or conforming mortgages, fixed or adjustable rate mortgages, and conventional or government-insured — all terms that refer to how big your loan is, how much interest you pay on it, and if the government is willing to pay back the creditor for what the money they’re out should you default. As with any loan you might get, the availability of mortgages is greater and the interest rates significantly lower for those with the best credit.

In order to qualify for the vast majority of mortgages, you’ll first need some cash on hand as a down payment on your property. Twenty percent of the selling price of the home is considered a standard down payment amount in order to get a mortgage, but there are some government programs like the Federal Housing Authority (FHA) that will guarantee loans against default and require as little as 3.5% as a down payment. Though FHA loans constituted more than 20 percent of all loans for single-family houses in the US as of 2016, most prudent financial minds suggest exercising the utmost caution when considering one of these loans. Not only will your monthly payment be comparatively high, since you’re starting with almost no equity on your property, all FHA loans require you to pay very costly mortgage insurance.

So what happens if you default on a mortgage? After the bank kicks you out of your house, it likely be sold at auction. If there is anything left over between the amount of equity in the house you’ve paid off and the auction price of the home plus the remainder of your loan plus the various associated court fees and penalties, you’ll get a check. This is one scenario to avoid at all costs.

Last Updated May 4, 2020

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