What is a mortgage?

A mortgage is fundamentally defined as a loan that is secured by real estate. When a borrower takes out a mortgage, they receive funds to purchase property, and in return, the lender holds a lien on that property as collateral. This means that if the borrower fails to make the required payments, the lender has the right to take possession of the property through a legal process known as foreclosure.

This arrangement serves both the lender and the borrower. The lender reduces its risk by having the property's value ensure the loan, while the borrower gains access to capital needed to buy a home, which they may not otherwise have. Mortgages are typically structured with long repayment periods, often spanning 15 to 30 years, providing borrowers with manageable monthly payment options.

The incorrect choices reflect different financial concepts. An investment strategy focuses on methods for growing wealth, life insurance pertains to financial protection for beneficiaries in the event of the policyholder's death, and a savings account is a deposit account that offers interest on the balance but does not involve the secured borrowing that characterizes a mortgage. Each of these options serves distinct financial purposes, highlighting the unique role that a mortgage plays in property financing.