MORTGAGING BASICS
Likely the largest debt you'll ever take on, a mortgage is a loan to finance the purchase of your home.
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 on a long term.
If you don't pay the debt, the
lender has the right to take back the property and sell it to cover the
debt. To repay the debt, you make monthly installments or payments that
typically include the principal, interest, taxes and insurance,
together known as PITI.
Principal:
The principal is the sum of money you borrowed to purchase your home.
Before the principal is financed you can give the lender a sum of cash
called a down payment to reduce the amount of debt that will be serviced.
Mortgage interest: is money you pay in interest to the lender that holds your mortgage. Every month, a mortgagee pays an equal sum that always includes principal and interest. The principal is the amount that is applied towards the original loan amount. The interest is amount the lender is charging you to borrow the money.
In the first five to ten years of a mortgage, the mortgage interest accounts for well over half of the scheduled monthly payment. As the mortgage ammortizes, the amount applied to the principal grows and the amount being applied to the interest decreases. This is because, when the principal balance is lowered, the amount of interest also lowers.
In the first five to ten years of a mortgage, the mortgage interest accounts for well over half of the scheduled monthly payment. As the mortgage ammortizes, the amount applied to the principal grows and the amount being applied to the interest decreases. This is because, when the principal balance is lowered, the amount of interest also lowers.
Taxes:
The taxes are property taxes your community levies based on a
percentage of the value of your home. The tax is generally used to help
finance the cost of running your community, say to build schools, roads,
infrastructure and other needs. You must pay property taxes even if you
don't need an escrow account and even after your mortgage is paid off.
Insurance:
Lenders won't let you close the deal on your home purchase if you don't
have home insurance, which covers your home and your personal property
against losses from fire, theft, bad weather and other causes. Even if
you pay cash for your home, you should buy home insurance unless you can
afford to repair or rebuild your home if it's damaged or destroyed.
If your home is in a federally
designated high flood risk zone within a flood plain and you are
signing for a federally insured loan, federal law mandates that you must
buy flood insurance. If you are not in a high flood risk zone, you
still may buy the coverage.
If you put less than 20
percent down on your home purchase, most lenders will also charge you
private mortgage insurance (PMI) premiums. The coverage doesn't protect
you, it protects the lender from you defaulting on the mortgage. Without
the coverage, many buyers could not otherwise afford to buy a home.
