Mortgage
A loan used to buy real estate, in which the property itself serves as collateral the lender can claim if the borrower stops paying.
What it means
A mortgage is a loan secured by a home or other real estate. The borrower gets the money to buy the property and agrees to repay it, plus interest, over a set term, most often 15 or 30 years. If payments stop, the lender can eventually take the property through foreclosure.
Most mortgages are amortized, meaning each monthly payment covers that month’s interest plus a slice of the principal. Early payments are mostly interest; later payments are mostly principal. Many monthly payments also include an escrow amount for property taxes and homeowners insurance.
Formula
M = P × r(1 + r)^n / ((1 + r)^n − 1)
- M = monthly payment (principal and interest)
- P = amount borrowed
- r = annual interest rate ÷ 12
- n = total number of monthly payments
Example
Suppose someone borrows $300,000 at an illustrative 6% fixed rate for 30 years. The principal and interest payment is about $1,798.65 a month, and total interest over the full term comes to roughly $347,515 if the loan is never paid off early.
How it’s used
- Buying a primary home, second home or rental property
- Comparing loan offers by rate, term, fees and APR
- Estimating how much house a budget can support
Strengths and weaknesses
Strengths
- Lets buyers own a home without paying the full price up front
- Payments build equity over time
- Long terms keep monthly payments manageable
Weaknesses
- Total interest over a long term can rival the original loan amount
- Missed payments can lead to foreclosure
- Comes with closing costs and, often, mortgage insurance
Good to know
- Compare the APR, not just the interest rate, since APR folds in many lender fees.
See it in the data: The median home price in hours of work →
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.