Selecting a Mortgage A mortgage conveys the ownership of property from the lender to the borrower over a period of time. During the process, the lender holds the property as collateral and you, the borrower, make monthly installment payments while residing on the property. Mortgage payments are usually weighted, with interest during the first years being most of the payment and with the principal being the smaller amount. In the later years of the mortgage, more of the payment goes to the loan balance and less to interest. As the principal or loan balance decreases, your equity or ownership increases.
Equity also increases if the value of the home increases.
The process of gradually increasing equity and reducing debt through payments of principal and interest is called amortization. The traditional mortgage of fixed monthly payments, fixed interest rates, and full amortization over a 30-year period is not the only mortgage available now. Many newer mortgages actually make it easier for you to purchase more house than you could have with a traditional mortgage, but the risks are greater. The interest rate may fluctuate, while the payments remain the same and the amount of principal paid off may vary. Some mortgages may offer a below-market interest rate, but it may not help you build up equity.