If you’re like most of us, you’ll have to get a mortgage to purchase a home. So what, exactly, is a mortgage?
What is a Mortgage?
The dictionary defines a mortgage as:
The charging of real (or personal) property by a debtor to a creditor as security for a debt (especially one incurred by the purchase of the property), on the condition that it shall be returned on payment of the debt within a certain period.
What that really means is that you borrow money from a lender to buy something valuable (in this case, a house). You agree to pay back the money you’ve borrowed within a certain period of time. On a mortgage, that’s generally 15 or 30 years, but yours could be different. If you fail to pay the money back, the lender gets to keep your house.
If you don’t pay, the lender will kick you out and re-sell the house to try to recoup the money they lost from your failure to pay; that’s a foreclosure.
- Collateral: Collateral is something of value that you offer to the lender in the event that you can’t repay your mortgage loan. In this case, it’s the house.
- Insurance: Your lender won’t agree to give you the money for a home unless you have insurance, which protects against losses in the event of a fire, theft, bad weather (but not always flooding—double check with your insurance company on that one to be safe).
- Interest: Interest is the money the lender charges you to use their money. You’ll see it in a percentage, which we know as the interest rate.
- Principal:The principal is the total of all the money you borrowed to purchase your home. That’s usually the value of the home, minus your down payment.
- Taxes: Your mortgage payment will probably include taxes. The taxes are paid to your community and tacked on to your mortgage.
There are several different types of mortgages, as well, which will affect the amount of money you must pay and the amount that a lender will agree to give you.
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