The term “mortgage” is commonly used to refer to the loan someone obtains to buy a home or property. Technically, the loan is one part of the arrangement. The other — the mortgage itself — is a legal claim (a “lien”) that gives the lender rights to the home or property used as security, until the loan is paid off.
The loan component of the financial package has two key features you should understand.
- Principal — the amount you are borrowing. For the lender, risk is balanced by their lien on the property.
- Interest — the additional amount you are paying, over time, to borrow the principal. Because mortgage loans usually take years to pay off, understanding that interest is compounded — “interest on interest” — will help you make sense of the total cost of the home.
For fun — the roots of the word “mortgage” are death (mort) and pledge (gage). It captures the long-term promises involved in buying a home.