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What Is a Mortgage and How It Works

  • Writer: Michael Garcia
    Michael Garcia
  • Apr 1
  • 2 min read

A mortgage is simply a loan used to buy property, where the property itself serves as collateral (meaning the lender can take it if you don’t pay).

Let’s break it down in a simple, real-life way:


🏦 What Is a Mortgage?

  • You borrow money from a bank or lender

  • You use it to buy a house/condo

  • You pay it back monthly over time (usually years)

👉 If you stop paying → the bank can foreclose (take the property)


⚙️ How a Mortgage Works (Step-by-Step)

1. Down Payment

  • You pay a portion upfront (usually 10%–30% in PH)

  • The loan covers the rest

👉 Example:House = ₱3,000,000Down payment (20%) = ₱600,000Loan = ₱2,400,000

2. Loan Approval

  • Bank checks:

    • Income

    • Credit history

    • Ability to pay

3. Monthly Payments (Amortization)

Every month, you pay:

  • Principal (your loan amount)

  • Interest (bank’s profit)

👉 Your monthly payment is called amortization

4. Loan Term

  • Usually 5, 10, 15, 20, or 30 years

  • Longer term = lower monthly payment but higher total interest

5. Interest Rate

  • Fixed or variable

  • Determines how much extra you pay over time


💡 Simple Formula (Concept)

Your payment is based on this relationship:

M=P⋅r(1+r)n(1+r)n−1M = P \cdot \frac{r(1+r)^n}{(1+r)^n - 1}M=P⋅(1+r)n−1r(1+r)n​

Where:

  • MMM = monthly payment

  • PPP = loan amount

  • rrr = monthly interest rate

  • nnn = number of payments

👉 Don’t worry about memorizing—just know:

  • Higher rate = higher payment

  • Longer term = lower monthly, but more interest

🧾 What Happens Over Time

  • Early years → mostly interest

  • Later years → more principal

👉 That’s why early payoff saves a lot of money


⚠️ What Happens If You Don’t Pay

  • Miss payments → penalties

  • Long-term non-payment → foreclosure

  • Bank takes and sells your property


🧠 Real-Life Example

  • Loan: ₱2,400,000

  • Interest: 7%

  • Term: 20 years

👉 Monthly: around ₱18k–₱20k (estimate)


✅ Types of Mortgage (PH Context)

  • Bank Housing Loan – common, flexible

  • Pag-IBIG Loan – lower rates, longer terms

  • In-house financing – from developer (higher rates)


🔥 Bottom Line

  • Mortgage = borrow now, pay over time

  • You don’t fully own the property until it’s paid off

  • The bank holds the title as security

 
 
 

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