Basics of Mortgages

What does a mortgage entail? A mortgage is a loan that a bank or mortgage lender provides for purchasing a house. When you obtain a mortgage, you use your home as collateral. If you fail to make payments, the bank or lender can foreclose on the house. Essentially, the borrower owns the home, but the lender holds ownership until the mortgage is fully paid off.

Your monthly mortgage payments cover principal, interest, taxes, and insurance.

Principal

The principal is the total borrowed amount for buying the home. For instance, if you borrow $200,000, the initial principal is also $200,000.

Interest

Interest is the extra cost of borrowing money. It can be fixed or variable. A fixed-rate mortgage has a set interest rate throughout the loan term. An adjustable-rate mortgage (ARM) has a rate that can change.

Taxes

Homeowners must pay property taxes based on home value, varying by state.

Mortgage Insurance

Lenders require homeowner’s insurance, especially with a down payment of less than 20%. This protects the lender if you default.

Amortization Schedule

This schedule details periodic loan payments, showing principal and interest. Early payments focus on interest, and later on principal.

Mortgage Note

A legal document you sign with a mortgage, stating payment terms and allowing foreclosure for non-payment.

Eligibility

Loan qualification is based on income. Monthly mortgage payments shouldn’t exceed 28% of gross income, or up to 40% with good credit. Be cautious not to overextend.

Types of Mortgages

Borrowers may choose between fixed-rate mortgages and adjustable-rate mortgages (ARMS). Fixed rates stay constant, while ARMs adjust over time based on an index.

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