Understanding Mortgage Loans - What is a Mortgage?

Understanding mortgage loans is an important first step toward obtaining exactly what you need to buy your property at favorable terms.  Surprisingly enough, most people not only misunderstand the workings of the mortgage industry, but also don’t even know what a mortgage is. The majority of people who think they know will say that a mortgage is a loan you buy a homes with, but this is not the case.  Therefore, the first lesson in understanding mortgages is an explanation of what a mortgage is.

A mortgage is not the loan itself, but what secures it.  Let me explain, whenever a loan is given, the lender normally requires some sort of recourse in case you don’t repay the loan.  That is, if you don’t repay, the lender wants to be able to do something about it.  If you borrow from the mafia, the recourse is broken limbs or worse, otherwise, if you borrow from a reputable lender, the recourse is some legal action.  The action that a lender may take in case you don’t pay is specified by something called a security instrument.  Now, a mortgage is a security instrument that specifies that if you don’t repay your loan, the lender is going to foreclose your property, which means that your property will be sold to the highest bidder and proceeds will go to the lender.

Mortgages don’t only apply to homes, but also to any real property.  Any piece of land is real property.  In addition any improvements to the land such as buildings, garages, homes, and barns, are also real properties.  But any movable objects, such as household appliances, are not considered part of the real property.  It is quite convenient for lenders to have mortgages secure loans with immovable property. This way a borrower cannot flee to the third world country of his choice and take the security along.

A mortgage loan is therefore a loan whose security instrument is a mortgage.  The lender gives the borrower a loan, and in return the borrower gives the lender a mortgage to the property.  That’s right, you understood this correctly. The borrower is the one who gives the mortgage! Therefore, if you are on the market for a home loan, you’re not looking to get a mortgage, you’re actually looking to receive a loan and give a mortgage in return.

Now that you understand exactly what a mortgage is, keep in mind that out in the real world mortgage loans are still commonly referred to as just 'mortgages', and therefore will be referred to as such on this Web site as well.