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A mortgage is a legal agreement by which a bank or other creditor lends money to you at interest in exchange for taking the title of the property, with the condition that the conveyance of the title becomes void upon the payment of the debt. The difference between a mortgage loan and a standard loan, besides the loan amount, is the collateral. Lenders use the home as collateral. If you default on the payments they can foreclose on the property. Which the bank is entitled to do so to make their money back from missed payments.

Mortgage payments depend on three variables; term, value, and annual percentage rate of the loan. The payment includes principal, interest, mortgage insurance, real estate taxes, and home owner’s insurance. The principal is the amount you borrow. M = P [(R/12)(1 + (R/12))^n ] / [ (1 + (R/12))^n - 1], where M = the monthly payment, P = the principal on the loan, R = the annual interest rate, and n = the number of months to pay off loan.

Mortgage insurance is the policy that protects the lender or titleholder if the borrower were to default on payments or are unable to meet the obligations of the mortgage contract. It can also be canceled once the balance is down 80% of the value of the home.

Generally, lenders determine how much mortgage you can afford based on income, credit score and current debts. Assuming that your monthly mortgage payment (principal, interest, taxes and insurance) should be no more than 28% of your gross monthly income. This is to ensure you have enough money for other expenses; closing costs, additional taxes and fees can add up as well.