5.2.1 What is a mortgage?

A mortgage is a type of loan often used to buy a home or other property. A mortgage allows the lender to take possession of the property if you don't repay the loan on time. The property is the security for the loan. Normally, a mortgage is a large loan and is paid off over many years.

When you get a mortgage loan, you are called the mortgagor. The lender is called the mortgagee.

Under a mortgage, you are responsible for making regular payments to the lender. The payments cover the interest on the loan plus part of the principal (the amount of the loan). Payments may also include property taxes, insurance and similar charges.

When you make a mortgage payment, the lender uses it first to cover the interest. Then anything left goes to the principal and in some cases to taxes and insurance. At the beginning, only a small amount goes to the principal, but gradually more of the payment goes to the principal until it is fully paid off. The part of the property that is paid for—both through the down payment and through your mortgage payments—is called your equity in the property.


The key to saving money on your mortgage is to pay off the principal as fast as possible. If you can make extra payments under the terms of your mortgage, the lender will apply them directly to the principal. By reducing the principal, you can save thousands, or even tens of thousands, of dollars in interest charges. But if you have debts with a higher interest rate, such as credit card debts, or other investments that could pay a higher return, you may be better off using your money for those items before making any extra mortgage payments.

Page details

Date modified: