Introduction to Mortgages

For the average home buyer, a mortgage is a prerequisite to home ownership, a mortgage being a loan using the home as collateral. Your home becomes the security the bank relies on if you should default on your mortgage; you will find that the mortgage agreement sets out a number of rules you must abide by as part of the loan terms.
There are two major components to the loan, the interest rate and the term of the loan, the term is the time period the loan will be paid back over, the interest rate is the rate of interest charged on the outstanding loan balance. At the start of the loan term the vast majority of your monthly repayments will simply be covering the interest charged on the principal balance, later in the loan term as the principal reduces, more and more of each payment reduces the outstanding loan amount.
The rate can be either fixed or adjustable rate mortgage (ARM, also known as a variable rate mortgage), the rate of an adjustable rate mortgage changes during the term of the mortgage and is "index linked" which means it will change in relation to an overall lending rate. In the UK, this is normally the Bank of England base rate, in the US it is usually the Federal Reserve's Prime lending rate. Often, fixed rate mortgages are only fixed for part of the loan term and then switch over to an adjustable rate mortgage; in some cases the fixed period is offered at a very low rate to entice customers, only to switch to a much higher rate after a few years with a lock in.