Understanding Mortgage Loans

A mortgage is described by Investopedia as working like this: “In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying his mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.”

A mortgage is the money lent to you by the bank so that you have enough money to buy (or refinance) a certain property. You will need to have some money of your own up front in order to make the purchase; lenders are not fond of 100% financing and rarely put such a loan into place. Furthermore, most people don't qualify for that kind of loan. You will want to have at least 20% of the total amount of the purchase price plus enough money to pay your “closing costs”, or the money that the bank or broker gets right up front (in addition to the interest on your payments as time goes by). You can qualify for a mortgage with substantially less than 20% of your own money to put against the price of the property, but you will find it more difficult to get a lower interest rate and you will be required to pay extra money with your monthly payments for Personal Mortgage Insurance. This is a federal mandate and is not open to question.

When you are paying back your mortgage loan, you will start off paying back almost all interest with every payment. As a rule of thumb, in the first few years of your mortgage loan, you are paying back only $4-$8 of principal for every $100 per month that you pay (depending on the length of the loan). You can offset this, however, by making extra monthly payments, which go to the principal. This will allow you to pay off your loan faster and in the long run pay less money. Some mortgages do not allow you to pay them down early without a “prepayment penalty” being tacked on in the first three years, so compare mortgage programs and lenders carefully.

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