Mortgage literally means death pledge, and the name makes grim sense
The word mortgage comes from Law French used in medieval Britain and means death pledge. The name is less sinister than it sounds. The pledge dies in one of two ways: either the borrower pays everything back and the claim on the house ends, or the lender takes the property through foreclosure.
A mortgage is a loan secured on real estate. Home buyers use one to purchase property, and existing owners can borrow against what they own for other purposes. In civil law countries it is known as a hypothec. The borrower is technically the mortgagor and the lender the mortgagee, a reversal that surprises many people, because it is the owner who grants the security. The lender's right to seize and sell the property if payments stop is the defining feature; without it, the arrangement would be just another loan.
That security gives the lender priority. If a borrower goes bankrupt, other creditors are paid from the sale of the house only once the mortgage lender has recovered its money in full. In the United States, loans typically run 30 years, and the most basic setup is a fixed monthly payment over ten to thirty years that gradually whittles down the original sum. Few people could buy a home outright otherwise, which is why mortgages dominate property purchases wherever home ownership is popular.
Rates come in two broad flavours. Fixed rates stay the same throughout. Adjustable rates are set for an initial period, then move with a market index, shifting interest rate risk onto the borrower; in exchange, the starting rate may be 0.5 to 2 percentage points below a typical 30-year fixed rate. Hybrid loans, fixed for say five years and floating afterward, are common too. The loan to value ratio compares the amount borrowed with the property's worth, so a 20 percent down payment means an 80 percent ratio.
Behind the scenes, lenders usually borrow the money themselves through deposits or bonds, so their own costs shape what homeowners pay. Many sell loans onward. Through securitisation, pools of mortgages are converted into bonds sold to investors in small pieces, while a separate servicer collects the monthly payments.
Source: Mortgage
