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How do mortgages work?

Mortgages are loans taken out to purchase a property. The borrower (mortgagor) agrees to repay the loan over a certain period of time with interest to the lender (mortgagee).

The mortgage is secured against the property, which means that if the borrower fails to make repayments, the lender has the right to repossess the property and sell it to recover the debt.

The amount borrowed is determined by the value of the property, the down payment made by the borrower, and the borrower’s ability to repay the loan based on their income and creditworthiness.

Mortgages come with different terms and conditions, such as the interest rate, repayment period, and payment schedule. The two main types of mortgages are fixed-rate and adjustable-rate mortgages.

Fixed-rate mortgages have a set interest rate for the entire term of the loan, typically 15 or 30 years, and the monthly payments remain the same. Adjustable-rate mortgages have an interest rate that can fluctuate based on market conditions, and the monthly payments can go up or down.

In addition to the principal and interest, borrowers may also have to pay for property taxes, homeowners insurance, and private mortgage insurance (PMI) if they put down less than 20% of the purchase price.