What is a Mortgage Loan?

A mortgage requires you to pledge your home as the lender's security for the repayment of your loan. The lender agrees to hold the title to your property (or in some states, to hold a lien on your title) until you have paid back your loan plus interest. If you do not repay your mortgage loan, the lender has the right to take possession of your house and sell it in order to satisfy the mortgage debt.

Principal & Interest.

All Mortgages have two features in common:

  • Principal: The first feature is the mortgage principal, which is the actual amount you borrow. For example, if you take out a $200,000 mortgage, your mortgage principal is $200,000.
  • Interest: The second feature is the interest, which is the money you pay for the use of the money you borrow. Interest rates are highly volatile and the amount of interest you pay over the life of the loan depends upon many different factors. The interest you pay on your mortgage may be deductible. (Consult a tax professional for advice).


Over the specific term of the loan (30 years - 15 years - 7 years - 5 years - 3 years - 1 year, etc,), you will pay your mortgage gradually through regular, monthly payments of principal and interest. The amounts of these payments are calculated to let you own your home debt-free at the end of a fixed period. During the first few years, most of your payments will be applied toward the interest you owe. During the final years of your loan, your payment amounts will be applied almost exclusively to the remaining principal. This type of re-payment is called amortization. In addition, when you sell your home you will be required to pay back any remaining principal balance due on your mortgage loan to your lender.

Four major factors that affect your mortgage payments:

The price of the house is determined by location, size, special features (such as garage, a deck, an extra bathroom, extra master bedroom), and overall market condition. However, before you fall in love with your new home, learn the four factors that maybe the key to whether or not you can afford that house of your dream.

  1. The size of your down payment,
  2. The amount of your mortgage,
  3. Your mortgage interest rate, and
  4. Re-payment term of the mortgage loan you choose.

A change in any of these four factors will influence how much house you can afford. Examine each of these four factors in detail and carefully, so you can get a good grasp of your buying power.