What is a Mortgage Loan?
Before I talk about “What is a Mortgage Loan,” I need to explain a thing called collateral. You must understand collateral before you can “get a handle” on mortgage loans and how they work.
There are basically two types of loans in use today.
The first is what most people might know as a “signature” loan. In a signature loan, you sign a loan contract and, based upon your promise to pay, the lender will give you money.
This is also called an “unsecured loan.” In other words, there is nothing guaranteeing that the lender will get the money back other than your word. Typically, an unsecured loan carries a much higher interest rate than the second type of loan.
The second type of loan is kind of the opposite. It is called a secured loan.
A secured loan is any loan where the person borrowing the money to buy an item has pledged an item of real property… Property that has “real” value, like a car, a house, or a successful company… to guarantee the repayment of the loan. That property is said to secure the loan. So, if you fail to repay the loan as promised, the lender will take possession of the property that you pledged and resell it to get their money back.The property that is used to secure the loan is called collateral.
Probably the most familiar example to most people is the repossession of a car. If the person who bought the car with the lender’s money fails to make their payments as promised the lender can take the car back.
In that example, the car is the collateral for the loan. Collateral “secures” the lender’s interest in the car because they can take possession of the car (repossess it) and sell it to get some or all of the money they loaned for the purchase of the car back. That is why it is called a secured loan.
So, what is a mortgage?
Technically a mortgage loan is any loan that has collateral.
If you take out a loan to buy a car, jewelry, large-ticket consumer items or anything that the lender can take back (repossess) if you don’t make the payments on the loan as promised, it is technically a mortgage.
However, most people in the United States of America will refer to any loan on real estate, normally a home or a building, as a mortgage. We don’t say “car mortgage” but we do say “home mortgage.”
In the United States, real estate mortgage loans fall into two general groups:
- Conventional Mortgages - These are mortgage loans offered by private companies and may or not require some sort of mortgage insurance. The exact terms and conditions vary from lender to lender. However, they are fairly uniform based upon the state in which the property to be financed is located. Different states have different rules and regulations concerning home loans.
- Federal Guaranteed Mortgages – These are mortgage loans made by private lenders. But, they are guaranteed by the federal government. There are two types: FHA and VA. See the post entitled ” What are the Major Types of Home Loans?” for more about federally guaranteed and issued home loans information.
In either case, your mortgage loan will be “written” by a private lender. But the exact legal mechanism used to secure the loan may be different.
Hope that answers the “What is a Mortgage Loan” question for you.