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Understanding Mortgages

What Is A Mortgage?

A mortgage is a loan to finance the purchase of your home. It is probably the largest debt you will every take on in your lifetime.

Once you purchase your home, you home becomes collateral. You will sign a legal contract binding you, the homeowner, to the payment of the debt.  This debt will include interest and other cost and will normally last between 15 to 30 years.

Your home is collateral for the loan, which is also a legal contract you sign to promise that you’ll pay the debt, with interest and other costs, typically over 15 to 30 years.

What Are The Repayment Conditions?

The lender has a right to take back your home and sell your home to cover the debt that you did not pay.  To repay your loan,  you will make monthly payments that include principal, interest, taxes and insurance. This is also know as PITI.

  • Principal – The principal is the total amount of money that you borrowed from your lender to buy the home. To reduce your principal, you can give the lender a down payment.
  • Interest – Also knows as the interest rate, this percentage is what your lender will charge you to use the money that you have borrowed.

The principal and the interest are what makes up the majority of your monthly payments. This process is called amortization. Amortization reduces your debt over a period of time. With amortization, your monthly payments are largely interest during the early years and principal later.

What About Taxes & Insurance?

Your mortgage payment is comprised of more than just interest and principal. It could also include the money that is deposited into an escrow or trust account. This money is used to pay insurance and taxes.

The most common use of an escrow account is when your down payment is less that 20 percent of your principal. In that case, your lender considers your loan riskier. As a result, your lender will setup an escrow account to collect additional expenses that will be calculated into your monthly mortgage payment.

  • Taxes – Taxes, commonly referred to as property taxes, are levied by your community based on a percentage of the value of your property. This tax is used to pay for your community’s expenses including schools, infrastructure, roads, etc. Everyone who owns a home  must pay property taxes.
  • Insurance – Without home insurance you will not be able to purchase your home. Insurance covers your home and all  your personal property against losses. These losses could be theft, fire, weather, etc.