Chapter 3:       What Is a Mortgage?

A mortgage is a loan secured by real estate.  In return for the money necessary to purchase a home, a lender gets your promise to pay back the money over a certain period at a certain cost.   Your promise to repay backed by the lender's claim to the property. If you stop paying the loan, the lender can take ownership of that property and may sell it to recover the money owed.  Typically, the repayment of a mortgage occurs through monthly payments over a period of fifteen to thirty years.

What Does A Mortgage Payment Include?

Usually, your monthly mortgage payment is made up of four parts known as (PITI):

1.         Principal

Principal is the amount of money you borrow based on the sale price of the home.  In the early stages of your mortgage term, your monthly payment includes only a small portion that repays your original principal.  As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.

2.         Interest

Interest is the cost of borrowing money.  In the early stages of your mortgage term, your monthly payment is mostly interest. As you continue to make payments through the years, a smaller portion of your payment goes to interest.

3.         Taxes

Taxes are paid by homeowners to local governments, and are usually charged as a percentage of the assessed property value.  Tax amounts vary depending on where you live.  The property taxes owed on the property are usually included in the monthly mortgage payment so the lender can be sure the taxes are paid as required.

4.         Insurance

Insurance offers financial protection to the lender and the buyer in the event of a loss and has two main components that can be included as part of your payment.  Homeowner's or hazard insurance protects you and the lender against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders will require you to have a homeowner's insurance policy on your home because it will help protect their investment as well as yours.

Mortgage insurance (MI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loan.  Usually, whenever the down payment is less than 20% of the home's purchase price, lenders require some type of insurance.  Loans insured by FHA/HUD programs require a mortgage insurance premium (MIP), while VA loans require a funding fee.  Conventional loans, or those without government backing, can be insured with Private Mortgage Insurance (PMI).

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