Mortgage Basics: What Is a Mortgage?

A mortgage is a loan that is used to purchase a property. The collateral for the loan is the property itself. This means that if you default on the loan, the bank can seize the property. Mortgages are actually quite simple. In this guide, we'll cover the basics of what a mortgage is, how it works, and why you might want to consider one.

How Does a Mortgage Work?

A mortgage works by allowing you to borrow money against the value of your home. The amount that you can borrow depends on the value of your home and your credit score. The interest rate on your mortgage will be determined by your credit score as well. 

The most common type of mortgage is a fixed-rate mortgage. This means that your interest rate will be locked in for the entire term of the loan, which is typically 30 years. This stability can be beneficial, especially if interest rates rise over time. 

Another type of mortgage is an adjustable-rate mortgage (ARM). With this type of loan, your interest rate will fluctuate with the market. This can be riskier than a fixed-rate mortgage, but it also has the potential to save you money if interest rates go down over time. 

Why Would I Get a Mortgage?

One of the biggest benefits of owning a home is the potential for appreciation. This means that as time goes on, your home will increase in value. If you have a fixed-rate mortgage, this increase in value is pure equity—it's like having money in the bank that you can access at any time. 

Another benefit of owning a home is that it provides stability and security. Unlike renting, when you own a home you know that you'll have a place to live for as long as you want (barring any unforeseen circumstances). This can be especially important if you have children and want them to attend schools in a certain district. 

Lastly, owning a home can provide certain tax benefits. The interest that you pay on your mortgage is tax deductible up to $1 million. Additionally, any property taxes that you pay are also deductible. 

As you can see, there are many reasons why someone might choose to get a mortgage. While there are some risks involved, overall getting a mortgage can be very beneficial. If you're thinking about buying a home, be sure to talk to your financial advisor about whether or not getting a mortgage makes sense for you.