Formally, a mortgage loan (or simply mortgage) is a legal agreement where a bank (or other authorized institution) lends money to the borrower in exchange for taking the title of the debtor’s property. The bank holds this title until the debtor fully repay the whole loan.
The essential part of a mortgage besides the loan amount (principal) is the interest, which is the cost of the loan for the debtor, and the remuneration for the bank. In other words, we can say that a mortgage is a form of a personal loan that the bank provides for the house purchase. The characteristic feature of each mortgage is setting the collateral on the real estate the debtor buys. It means that if the debtor is unable to realize the periodic payments (installments) at the agreed due dates, the lender can take ownership of the property.
The most typical layout for repaying a mortgage loan is to make equal payments that consist of an altering part of principal and interest over the agreed term. This kind of schedule generally corresponds to amortization loan in the US and Canada or repayment mortgage in the UK. From the perspective of the lender, a mortgage is a type of annuity, which is based on the time value of money concept.
Since we designed this mortgage calculator for estimations related to the amortized type of mortgage mentioned above, in the following, we focus mostly on this type of loan. Still, it is worth to know that a mortgage might have other repayment structure that involves different calculation procedures. Such arrangements are, for example, interest-only, reverse mortgage, or balloon payment mortgage.
