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Financial Terms and Glossary

Definition of Mortgage

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A mortgage is a type of loan where the loan is used to purchase property and the property, in turn, is used as a guarantee or lien for the loan amount.

There are several types of mortgages available including fixed rate mortgages, balloon mortgages, and adjustable rate mortgages.

In most mortgage terms there is the requirement for a down payment of some percentage of the loan. Typically the down payment must be 5% to 20% of the mortgage, although, there are some mortgages available that do not require a down payment. One advantage of paying a larger down payment of 20% or more is that the debtor is often not required to carry PMI or mortgage insurance.

In recent years the interest only mortgage has gained popularity. This type of mortgage has allowed people to buy larger homes. The drawback is if the home values fall, then many may default on their loans as the home will be worth less than the mortgage price and the home owner was unable to grow any equity over the time they lived in the house.

In a fixed rate mortgage the interest rate of the loan is fixed for the term of the loan which is usually 15 or 30 years.

In an adjustable rate mortgage, or ARM, the rate can be changed as the prime rate or other standard rate changes.

A balloon mortgage is one in which the rate is set for a given amount of time and then the entire loan is due at the end of that time.

Typically balloon mortgages and ARMs have a lower rate than fixed rate mortgages, but carry additional risk.

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