A mortgage is a transfer of an interest in real estate as security for the repayment of a loan.  A typical mortgage transaction involves a home purchaser borrowing money from a lender and entering into a written agreement with the lender, so that the real estate is collateral for the loan.  If the homeowner defaults on the loan, the lender is entitled to foreclose on the real estate and have it sold to reduce the debt (more on Foreclosure).  Depending on the terms of the agreement, the lender may then be entitled to pursue the homeowner for payment of any deficiency between the real estate sale proceeds and the debt owed.

The Mortgage Loan Process

A borrower (or mortgagor) obtains a mortgage loan through a process of application and commitment.  The borrower initiates the process by submitting an application to the lender (or mortgagee) and in some cases paying a nonrefundable fee.  The lender conducts a risk evaluation to determine whether a mortgage loan will be granted.  In the risk analysis, the lender evaluates both the borrower's financial position and the value of the real estate.  If the lender determines the risk to be acceptable, the lender will issue a loan commitment detailing the loan amount, repayment terms, interest rate, and other pertinent conditions. Because the commitment will normally contain terms and conditions not found in the loan application, it typically constitutes a counteroffer to make a loan.  When the borrower accepts the commitment, a binding contract for a mortgage loan is created.

Residential mortgage loans usually bear interest at a fixed annual percentage rate over a period of fifteen or thirty years.  The interest rate is determined by the prevailing market conditions at the time the loan is made.  A lender may increase its yield beyond the stated interest rate by requiring the borrower to pay "points" at the time the loan is made.  One point equals one percent of the loan amount.  It may also be beneficial for the borrower to pay points in order to reduce the interest rate over the term of the loan.