A Mortgage Primer

Purchasing a house or a piece of property is one of the biggest investments you can make in your lifetime. Your home is the place where you feel safe, and where memories are created.

For many homeowners, a mortgage is an expense that ranks at the top of monthly financial duties. In many cases it might represent the biggest bill you have to pay on a regular basis.

But what exactly is a mortgage?

And how does it work?

It’s not uncommon in today’s world for homeowners to have a vague understanding of their own mortgage and its many components.

Starting from the beginning, a mortgage is a loan made by a bank or lending institution. The principal is the actual amount of money that you borrow from the bank. The interest is the fee you pay to the lending institution or bank for borrowing their money.

Generally there are two types of mortgages – one is a fixed rate and the other is an adjustable rate mortgage (ARM). The fixed rate mortgage has an interest rate that will never change for the life of the mortgage.

Conversely, the ARM has an interest rate that varies over time, and it can fluctuate depending upon several other factors, including the economy, the state of the housing market, and the stock market. ARMs can be tricky to understand, and aren’t typically recommended for first-time buyers.

At the beginning of a mortgage term, which can range from 10 years to 30 in most cases, you’ll be making payments every month. The majority of each payment will go towards the interest, and a smaller part will pay the principal.

Over the time of the loan, the formula changes and more of your monthly payment will go towards the principal versus the interest.

Another component to the mortgage payment is property tax. This tax is calculated by the government every year and varies depending upon where your home is located. Taxes are used to fund everything from police departments to maintenance on bridges and roadways.

Part of the money you pay every month is collected by the lender and placed into what’s known as escrow. This money is then paid out at the end of the year to take care of the taxes.

Insurance represents another piece of the mortgage payment and is collected every month and also placed in escrow. There are two types of insurance, one is for property and protects your home against threats like fire and flood.

The second type of insurance is Private Mortgage Insurance and must be paid by borrowers who put down less than 20% of the actual price of the home or property. Known as PMI, this insurance allows the lender to sell the mortgage to other borrowing institution, who purchase them with the assurance that the debt will be paid.

Mortgages are key for anyone who wants to own a home. Knowing how they work, and what to budget for them each month is financially responsible and key to making sure your home or property is secure.

Contact my office for more information by either email or phone, 410.491.0200.