What is a mortgage?

A mortgage is fundamentally a loan specifically tailored for the purpose of purchasing real estate. When a borrower takes out a mortgage, they receive funds from a lender to buy a property, and in return, they agree to repay that loan over a specified period, typically with interest. The property itself usually serves as collateral for the loan, meaning if the borrower fails to make the required payments, the lender has the right to seize the property through a legal process known as foreclosure.

Understanding this definition is crucial, as it highlights the key characteristics that differentiate a mortgage from other financial instruments. For instance, unlike investments in stocks and bonds, which involve buying equity and are subject to market fluctuations, a mortgage is a secured debt designed specifically for real estate transactions. Similarly, a mortgage should not be confused with a savings account, which is a place to store money and earn interest, or an insurance policy, which provides financial protection against specific risks.