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A mortgage is a device used to create a lien on real estate by contract. The mortgage is an instrument that the borrower called the mortgagor uses to pledge real property to the called the mortgagee as security for a debt, also called hypothecation.

The mortgage instrument contains two parts:

the mortgage, which is the pledge
the note, which is the actual evidence of the debt and promise to repay

 
 
To protect the lender, a mortgage is recorded in the public records creating a lien (when there are multiple liens, order of recording determines priority). Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that the lien of the mortgage is prior to anyone else's claim.

At common law, a mortgage was a conveyance that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met usually, but not necessarily, the payment of a debt by the original landowner. Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form and in theory required no further steps to be taken by the creditor.
 
 
Mortgage loan types
There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

Fixed rate mortgage the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the US, the term is usually for 10, 15, 20, or 30 years. In the UK the fixed term can be as short as five years, after which the loan reverts to a variable rate.

Adjustable rate mortgage, the interest rate is fixed for a period of time, after which it will periodically annually or monthly adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the Adjustable rate mortgage's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from an Adjustable rate mortgage outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.

  
 
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