So What Is a Mortgage, Exactly?

Contrary to what you may think, a mortgage is not a loan. A mortgage is actually a lien on the property which secures the loan. In this day and age, the terms mortgage and loan have come to be used interchangeably. Of course they are related but, in fact, they are indeed two different things. Lenders are well aware of this; it is best that you have this information as well.

The word mortgage is believed to originate from the Old French words mort (meaning “dead”) and gage (“pledge”). If the borrower failed to pay what was owed, then the lender would receive the pledged property, thus making that property “dead” to the borrower. If the borrower paid the debt, then the pledge would be dead with regard to the lender. This etymology seems to be correct, based on modern English’s definition of the word.

Perhaps you’re familiar with the terms mortgagor and mortgagee. But do you know which is which? The term mortgagor refers to the party that borrows money. This party grants, pledges, or gives a lien on his or her property as security to the lender. The term mortgagee refers to the party which receives the lien as security, the lender. So, you as the homebuyer are the mortgagor, because you are giving the lender a lien on your property as security against default. The lender is the mortgagee, because they will receive the lien on your property.

Now that you have a clearer understanding of exactly what a mortgage loan is, let’s take a closer look at its components.

A mortgage loan has three components, without which the loan would not be viable. Each component must have a value, or the loan cannot be computed. These three components are:

  • The size
  • The interest rate, and
  • The term

The size of the loan simply refers to its face value; in other words, the amount of money that you wish to borrow. The interest rate is the regular and recurring fee that the lender charges for the borrowed funds. It’s usually expressed as a percentage of the loan, and it is calculated on an annual basis. It has a direct bearing on the size of your monthly payment. The lower the interest rate, the lower your monthly payment will be; the higher the rate, the higher your payment. The loan’s term refers to how long it will take to fully amortize, or pay off, the loan. It may be expressed in months or years.

Another term which must be addressed with regard to mortgage loans is the point. A point is equivalent to one percent (1%) of the face value of the loan. So for a $50,000 loan, one point would equal $500. Points come in two fashions: origination points and discount points. Origination points are fees that a lender sometimes charges to originate, or begin, the loan process for you. Discount points are fees that lenders charge to lower your interest rate, which would lower your monthly payment.

Even though both of these fees are paid “up front”, they should be considered interest payments. This is very important when considering another very common term associated with mortgage loans, the Annual Percentage Rate, or APR.

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