QandAs: Loans

What is a Mortgage?

Answer:
A lot of people and more specifically first time home

buyers want to know what the difference is between a home loan and a Mortgage. There is no difference, a Mortgage is the proper name for a home loan. Mortgages come in many different flavors and each product is designed to meet your individual needs.

So what is a Mortgage and what does it do? Most of us can't afford to pay cash for a home. A home is a very large purchase and one of the largest investments most of us will make. Yes, a home is an investment. Unlike a vehicle a home appreciates over time. A lender or bank will take the value of the home as security in case you default on the loan. This makes it an attractive lending vehicle as a homes value will only increase over time. This means there is less risk for the lenders.

So the lender is known as the Creditor. The Creditor is the party that provides the Mortgage and the company the Mortgage debt is owed.

You, being the buyer is known as the Debtor. You owe are in debt to the Creditor while paying on a home Mortgage.

The Mortgage or home loan itself is a loan that takes an annual percentage rate or APR to determine interest rates for the loan. The Mortgage Lender will only loan money if they can earn interest on their investment, this is where the APR comes into play. The APR is calculated by the prime rate index which is an equation banks calculate based on the Federal Reserve's Discount Rate and the Federal Runds Rate.

To get down to brass tax, you find a home you would like to purchase. You contact a Creditor (or lender, or home loan company). They get detailed information on the home and some personal information from you. They then calculate what your Mortgage will be. Your Mortgage is based on the product, the payment cycle, your credit history and the annual percentage rate. You close on the home, you pay the Creditor based on your payment schedule. Eventually you pay off the Mortgage, meaning you no longer owe the debt to the Creditor and your home is 100% paid for.

A Mortgage is a complex cycle. There are dozens if not hundreds of topics we cover regarding a Mortgage or Home Loan. For more information on home loans try our search function or view the 'more Q&A sessions like this' section below.