What is a Mortgage in Real Estate?

A mortgage is a legal instrument that creates a lien on real property as security for a debt. In a mortgage transaction, two documents are involved: the promissory note (the borrower's personal promise to repay the loan) and the mortgage itself (the security instrument that pledges the property as collateral). The borrower is called the mortgagor and the lender is the mortgagee.

When the loan is fully repaid, the mortgagee records a satisfaction (or release) of mortgage. There are several types of mortgages: conventional loans (not insured by the government, typically requiring 20% down to avoid PMI), FHA loans (insured by the Federal Housing Administration, requiring as little as 3.5% down), VA loans (guaranteed by the Department of Veterans Affairs, offering 0% down for eligible veterans), and USDA loans (for rural properties). Mortgages can be fixed-rate (same interest rate for the entire term) or adjustable-rate (ARM, where the rate adjusts periodically based on an index).

Common mortgage terms are 15 and 30 years. In "lien theory" states, the borrower retains title and the lender holds a lien. In "title theory" states, the lender holds title until the loan is paid.

Most states follow lien theory. If the borrower defaults, the lender must go through judicial foreclosure in mortgage states (a court process), which is typically longer than the non-judicial foreclosure available in deed of trust states.