Function

• The function of a mortgage loan is to help an individual afford buying real estate over time, rather than having to make the purchase outright. In a mortgage loan, the lender purchases the property on behalf of the borrower. The borrower then makes payments to the lender. When the borrowed amount--plus interest--is repaid to the lender, the borrower receives the title to the real estate and has full ownership. This process allows people or businesses to buy real estate on credit.
  
  

Features

• The mortgage loan is made up of several components. The "principal" is the amount of money borrowed from the lender to purchase the property. The "term" is the length of time the mortgage loan will be held. Common terms include 5, 7, 15, 20 and 30 years. The "interest rate" on the mortgage loan is the cost of borrowing. This number is often expressed as an annual percentage rate, or APR.
  
  

Costs

• The cost of a mortgage loan to the borrower is the interest rate charged by the lender. This rate may be fixed or adjustable. In a fixed-rate loan, the interest rate remains the same throughout the lifetime of the loan. With adjustable-rate loans, the lender is able to adjust the interest rate up or down, depending on the current going rate. Adjustable-rate loans often fluctuate based on the movement of the prime rate.
  
  

Types

• There are several types of mortgage loans. A conventional loan is a basic form, provided from the lender to the borrower directly. In an FHA loan, the United States Department of Housing and Urban Development (HUD) backs the lender if it lends to an FHA-qualified borrower. This results in lower down payment requirements and interest rates. A similar loan is the VA loan, which is backed by the Department of Veteran's Affairs on behalf of U.S. Armed Forces veterans and personnel.
  
  

Considerations

• Mortgage loans are collateral-based loans. This means the value of the loan is backed by the loan itself. Should a homeowner default on his loan, the lender may take full ownership of the property through the foreclosure process. Borrowers should have the ability to make monthly repayments on time to avoid foreclosure.