Definition
A mortgage is a special type of secured loan in which the real property serves as collateral to guarantee the loan by the lender. A lien is maintained by the lender until the loan is repaid.
Analysis
A mortgage loan allows for consumers to live in the home and build an ownership interest in the property. It allows for them to repay the loan over many years.
Mortgage loans may be opened for just a few years, or they may be set for many years. Thirty years is the most common term for a mortgage loan, although terms of fifteen or twenty years are also common. In recent years, loans of as many as forty years have been approved.
Mortgage loans appear on a credit report which tracks the payment history of the loan. Credit scores may benefit from a properly paid mortgage.
Ten percent of credit scores are based on a good mix of accounts. A mortgage, along with a car loan and major credit card can provide a good mix for credit scoring purposes.
Many mortgage brokers incorrectly state that a consumer will see a large increase in their credit scores by making mortgage payments on-time for twelve months. Credit bureaus do not actually provide much of a credit boost from mortgage loans in which the balance is close to the original loan balance.
A major portion of the loan must be paid off before the credit score will increase substantially. This can make refinancing new loans more difficult.
A mortgage is recorded as an installment loan. Most mortgage contracts allow for more rapid repayment of the loan if the consumer is able. However, some loan contracts have predatory terms such as prepayment penalties or balloon notes that can make repayment more difficult.
If a homeowner begins falling behind on a mortgage, it is up to them to contact the lender and provide a plan to correct any arrears. If a homeowner fears they will be unable to catch up with payments without help, they may wish to contact a housing counselor to avoid foreclosure.
