How a Mortgage Works?

A mortgage is a legal agreement where you borrow money to buy a home and agree to repay it over time. The amount you borrow is called the principal, and you also pay interest—a fee for borrowing.

The Two Parts of a Mortgage

Promissory Note
Your personal promise to repay a loan, including interest rate and payment schedule.

Mortgage Document
The security instrument that ties the debt to the property and gives the lender foreclosure rights.

Common Types of Mortgages

Fixed-Rate
Interest rate stays the same for the entire term, making payments predictable.

Adjustable-Rate (ARM)
Interest rate can change based on market conditions, so payments may vary.

By Down Payment

Conventional Mortgage
Requires a down payment of 20% or more. No mortgage insurance needed.

High-Ratio (Insured) Mortgage
Down payment is less than 20%. Requires mortgage insurance but often offers lower interest rates.

By Flexibility

Closed Mortgage
Locked in for a set term. Paying off early or switching lenders usually incurs penalties.

Open Mortgage
Allows you to pay off any amount anytime without penalty. Subject to higher interest rates.

Conventional Mortgage
Starts as an open mortgage but can be converted to a closed, fixed-rate term later.

NOTE: 

  • Security: The loan is secured by your home. If you fail to make payments, the lender can foreclose.
  • Ownership: You own the home and are responsible for maintenance, taxes, and insurance. The lender holds a lien until the mortgage is paid off.