A mortgage or a mortgage loan is an asset-backed loan provided by a lender to a borrower. The lender, usually a financial institution, will hold the real asset being purchased or constructed by the borrower as collateral in the case of defaulting debt repayments or insolvency of the borrower.

Mortgages are usually signed in obtaining a loan for the purpose of acquisition or construction of a house. However, the same concept applies for entities borrowing money for a commercial property (Eg: office premises, warehouse, apartment complex etc).

Failure to repay the interest and principal debt within the stipulated time frame might force the lender to seize the asset against which the mortgage loan was obtained. This process is also known as foreclosure or reposession.

Mortgage Loan Types

There are two main types of mortgages, depending on the nature of interest rate affixed with the loan.

(1) Fixed Rate Mortgage (FRM): The interest rate would be fixed or constant throughout the loan period. The repayment value could be adjusted to be constant or gradually decreasing through the loan term.

(2) Adjustable Rate Mortgage (ARM): Also known as floating rate, this type of mortgages will have a fixed rate for a short term and then adjusted (increased or decreased) based on the risk factors borne by the lender. In essence, ARM is used to transfer the interest rate risk to the borrower.