Easy-to-Understand Explanations of a Mortgage

Easy-to-Understand Explanations of a Mortgage

Easy-to-Understand Explanations of a Mortgage

A mortgage is a loan for the purpose of buying a house. It’s a”secured loan,” meaning that you have to put up security in exchange for your loan. The security is your house itself. You repay the mortgage in monthly obligations. If you do not pay, the creditor can foreclose–which is, take the house and sell it.

Types

The two basic kinds of home loans are fixed-rate mortgages and adjustable-rate mortgages. This refers to the rate of interest charged by your creditor. With a fixed-rate mortgage, or FRM, the interest rate never changes, so that your monthly payment for principal and interest remains the same. Within an adjustable-rate mortgage, or ARM, the interest rate varies from time to time. That means your monthly payment may increase or reduce.

Time Frame

Most mortgages are drawn up as if they will be repaid over 30 decades. But you do not have to actually keep the house for 30 decades. If you decide to sell the house , which is what the vast majority of folks do, you simply take the money you get from the buyer and pay off whatever is left on the mortgage. Some mortgages are just for 15 years; interest rates on 15-year loans are usually lower, however, the monthly premiums remain higher because you’re paying off the loan in half the time.

Characteristics

The normal monthly mortgage payment is made up of four elements: principal, interest, taxes and insurance. The”main” is the money that you’re repaying into the bank. If you borrowed $300,000, then that’s the principal. To pay off the mortgage, you’ve got to repay the entire $300,000. “Interest” is exactly what the bank charges you for the privilege of using its money to purchase the house; the greater the rate of interest, the more you’ll have to pay interest every month. Most mortgage debtors, but not all, also pay a portion of their property taxes and their homeowner’s insurance premiums every month. The lending company collects these obligations in a special account and then pays the insurance and tax bills when they come due.

Factors

Over the course of a mortgage, it is common to pay more in interest than you do in main. For instance, if you take out a $300,000 non-refundable mortgage at 6 percent yearly interest and pay it off over 30 decades, you will pay a total of about $650,000–the initial principal and roughly $350,000 in interest. Further, the interest is”front-loaded,” meaning that at the beginning of the loan that your payments are mostly interest, and just a little of this money goes to reduce the principal. For instance, your initial payment on the loan described above will be about $1,800–$1,500 in interest and only $300 in main. But at the close of the mortgage, assuming you haven’t sold the house by then, you’re paying mostly principal.

Caution

Most mortgage lenders will expect you to make a down payment–which is, place some of your own money toward the purchase price of the house. If your down payment is less than 20 percent, your lender may ask you to pay premiums for”mortgage insurance,” which compensates your creditor in case you stop paying the mortgage. When the whole amount of your loan principal has fallen below 80 percent of the value of the house, you no longer have to pay for mortgage insurance.

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