A mortgage is a loan used to purchase a home or a piece of property. It is the most common type of personal debt across the world. 

As long as you put down a small percentage — usually 20 percent — of the asset value first, a mortgage allows you to borrow the rest from a lender and pay off the loan over a set number of years.

The mortgagor — the borrower in a mortgage, typically a homeowner — has the legal right to evict the residents and sell the home if you do not pay back the loans as agreed. Only after you completely pay them off do you legally own the home “free and clear”, gaining outright ownership of it.

The types of mortgages mainly vary depending on the mortgage’s term — the number of years you will pay back your loan. The most popular mortgages run for 30 years, but 15 years or shorter mortgage terms are also very common: the shorter you carry a mortgage, the less you pay in total interest. 

Types also vary according to the prearrangement of interest rate. A fixed-rate mortgage requires the borrower to pay the same interest rate for the entire term, whereas an adjustable-rate mortgage (ARM) allows the borrower to pay interest as per the market interest rate, which can fluctuate over time. An ARM becomes cheaper if the interest rates decrease, but one must be able to afford the risks of higher monthly payments in the case of an increase in rates. 

Although mortgages can be stretched out for as long as 40 years, it is advisable to pay them off as early as possible. By the end of your term, especially if it is long, you will have paid much more than you initially borrowed. However, you can minimize the interest payment by making extra payments towards the principal balance directly every month: you owe less in interest as you pay down your principal. 

Mortgages are a cost-effective way to borrow and afford your own home. Their interest rates tend to be lower than those of other loans because mortgage loans are secured against your home until it is paid off. 

However, there is a possibility that your mortgage application may be rejected, especially if you have poor saving or spending habits. When a bank or other financial institution reviews your mortgage application, it assesses your credit history, debt, income, among other factors.

As housing prices continue to rise in both Taiwan and the United States, making mortgages the only way for most people to own a home, it is increasingly crucial for you to foster responsible financial habits early on to realize your dream of owning a home in the future.