What is a Mortgage?

A mortgage pledges your home as security for the repayment of a loan. The lender can hold the title of the home or a lien on the title until the entire loan is paid back. If the loan is not paid back then the home will be sold so the lender can recover their money.

A loan consists of three basic elements:

  • Principal
  • Interest
  • Term

The principal is the actual amount of money that was borrowed. The interest is extra money paid to the lender for having borrowed the principal. One of the advantages to home ownership is that the interest on home loans is tax deductible. And the term is the time period over which the loan will be repaid.

Amortization means the gradual repayment of a loan so that at the end of the term, you will be debt free. The first few payments will be to mostly pay off the interest, however the last few are to almost exclusively to pay off the principal.

It is important to accurately determine the maximum home loan monthly payment you can afford. If you do not you may find yourself struggling to make payments on your mortgage.

Lenders will almost certainly insist that you put an amount of your own money upfront towards the purchase of your house; this is known as the down payment. Down payment requirements from lenders use to be around 20% the buying price of the home. However, many lenders realize that 20% can be a very large amount of money to come up with, and so offer agreements with down payments less than 20%. If your loan agreement has a down payment of less than 20% the lender might insist you get private mortgage insurance (PMI). Private mortgage insurance protects the lender in case you default. In addition to considering the cost of PMI, you should also consider the cost of moving expenses and closing costs.

Some lenders will give you the option of paying mortgage points. The payment of points is an upfront payment to the lender, in exchange the lender will give you a lower interest rate over the life of the loan.

It is important to carefully study your own financial position before committing to a loan. Be sure to talk to your lender about the different options available to you.

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