How Mortgages Work

Individuals and businesses use mortgages to buy real estate without paying the entire purchase price up front. The borrower repays the loan plus interest over a specified number of years until they own the property free and clear. Most traditional mortgages are fully amortized. This means that the regular payment amount will stay the same, but different proportions of principal vs. interest will be paid over the life of the loan with each payment. Typical mortgages last for 15 or 30 years, but some mortgage terms can be longer. 1 Mortgages are also known as liens against property or claims on property. If the borrower stops paying the mortgage, the lender can foreclose on the property. For example, a residential homebuyer pledges their house to their lender, which then has a claim on the property. This ensures the lender’s interest in the property should the buyer default on their financial obligation. In the case of foreclosure, the lender may evict the residents, sell the property, and use the money from the sale to pay off the mortgage debt.