Home Loan

A home loan, more formally known as a mortgage, is a loan extended specifically for the purchase of residential property, secured by the property itself as collateral. If the borrower fails to keep up with the agreed repayments, the lender has the legal right to take possession of the property through foreclosure and sell it to recover the outstanding debt, which is why the terms "home loan" and "mortgage" are generally used interchangeably in everyday conversation.

Home loans are typically repaid over an extended period, commonly 15, 20, or 30 years, through regular installments that cover both principal and interest, allowing buyers to spread the enormous cost of a home across many years of manageable payments rather than needing to pay the full purchase price upfront.

Because most people cannot pay the full price of a home in cash, a home loan lets a buyer pay a smaller upfront deposit and borrow the rest, gradually repaying the lender over many years while living in the property throughout. The lender's security for that long-term arrangement is the home itself: as long as the borrower keeps making payments, they retain full use of the property, but the lender retains the right to reclaim and sell it if the borrower stops paying.

• Principal: the original amount borrowed to purchase the property.
• Interest rate: the cost of borrowing, either fixed for the full term or adjustable and tied to a reference rate.
• Term: the length of time over which the loan is scheduled to be fully repaid, commonly 15 to 30 years for residential property.
• Down payment: the portion of the purchase price the buyer pays upfront in cash, with the loan covering the remainder.

Home loans come in several structural types, most commonly a fixed-rate mortgage, where the interest rate stays the same for the entire term, and an adjustable-rate mortgage, where the rate can change periodically based on market conditions. Government-backed or government-insured home loan programs, such as those offered through agencies supporting lower down payments or more flexible credit standards, also exist in many countries specifically to widen access to homeownership beyond what the purely private lending market would offer on its own.

Lenders assess a home loan application based on the borrower's income, existing debt obligations, credit score, and the size of the down payment being offered, generally requiring a lower loan-to-value ratio or a stronger credit profile from borrowers who present more risk on any one of these factors. The specific documentation, underwriting standards, and typical loan terms available vary considerably by country, reflecting differences in housing markets, regulation, and the structure of each country's mortgage finance system.

Buyers who put down a smaller percentage of a home's purchase price are generally required to pay for private mortgage insurance, which protects the lender, not the borrower, against loss if the loan defaults and the home's sale proceeds do not cover the outstanding balance. This insurance is typically required until the borrower's equity in the home reaches a set threshold, at which point many loan programs allow the borrower to request its removal, reducing the total monthly cost of the home loan going forward.

Because home loan payments gradually reduce the principal owed while, in many markets, property values have historically tended to rise over long periods, taking out and steadily repaying a home loan is one of the most common ways ordinary households build long-term wealth, converting money that would otherwise be spent on rent into growing equity in an asset the household itself owns and controls, subject of course to the risks that property values can also fall and that missed payments can still result in foreclosure.

• Consumer Financial Protection Bureau