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| Mortgage is a security for the loan that a lender makes to the
borrower. It is a debt taken in terms of a loan to finance the purchase
of a home. This is also a legal contract a borrower signs to pay back
the debt to the lender, with interest and other costs, over a stipulated
time, ie. 10 years or 15 years. If the borrower does not pay the debt,
the lender has the right to take back the property and sell it to
cover the debt. |
What is a mortgage ?
Mortgage is a security for the loan that a lender makes to the borrower. It
is a debt taken in terms of a loan to finance the purchase of a home. This is
also a legal contract a borrower signs to pay back the debt to the lender, with
interest and other costs, over a stipulated time, ie. 10 years or 15 years.
If the borrower does not pay the debt, the lender has the right to take back
the property and sell it to cover the debt.
When repaying the debt, the borrower makes monthly installments / payments including
the principal, interest, taxes and insurance, together known as PITI.
Principal: The principal is known as the sum of money obtained by the borrower
to buy the home. Before the principal is financed the borrower can give the
lender a sum of cash called a down payment to reduce the amount of money that
will be financed.
Interest: The lender charges the borrower a (rate) percentage called the interest
to use on the borrowed money. Principal with interest include the bulk of borrower’s
monthly payments in a process called amortization, which reduces the debt over
a set period of time. With amortization, borrower’s monthly payments are largely
interest during the early years and principal later.
Additionally to borrower’s principal and interest, the mortgage payment could
include money that is deposited in an escrow / trust account to pay certain
taxes and insurance.
Taxes: These are property taxes on borrower’s community levies based on a percentage
of the value of the home. The tax is generally used to help finance the cost
of running the community, ie. to build schools, roads, infrastructure and other
needs. The borrower must pay property taxes even if he/she does not need an
escrow account and even after the mortgage is paid off.
Insurance: Lenders will not let the borrower close the deal on home purchase
if he/she does not have home insurance, which covers the home and his/her personal
property against losses from fire, theft, bad weather and other causes. Even
if the borrower pay cash for the home, he/she should buy home insurance unless
he/she can afford to repair or rebuild the home if it is damaged or destroyed.
If the borrower is signing for a federally insured loan, federal law authorizes
borrower to buy flood insurance. If borrower is not in a high flood risk zone,
he/she still may buy the coverage.
If borrower put less than 20% down on home purchase, most lenders will also
charge private mortgage insurance (PMI) premiums. The coverage does not protect
the borrower, but the lender from borrower defaulting on the mortgage. Without
the coverage, many buyers could not afford to buy a home.
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