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What is a Mortgage?
A mortgage is a loan that a bank or mortgage lender gives you to finance the purchase of your home. The house you purchased serves as collateral in exchange for the money you borrowed from the bank or lender. A mortgage payment is composed of the principal, interest, taxes and insurance. Mortgage payments are paid on a monthly basis.
Elements of a Mortgage
The principal is the sum of money you borrowed to buy your home. For instance, if you have a $500,000 mortgage loan, the beginning principal balance is $500,000. To lower your principal amount upfront, you can put down a percentage of the home’s purchase price as a down payment. Lenders typically require a down payment of about 20% of the home’s purchase price.
Interest is the price you pay to borrow money from your lender. The lender can also charge you points and additional loan costs. Mortgage points come in two varieties: origination points and discount points. In both cases, each point is one percent of the loan amount. For example, on a $150,000 loan, one point is equal to $1,500. Origination points compensate loan officers and are not tax deductible. Discount points, on the other hand, are prepaid interest. Generally, the purchase of each point lowers the interest rate on your mortgage anywhere from .25% to 1%. You pay both origination and discount points at closing.
In addition to your principal and interest, you will also pay taxes. Taxes are the property taxes you pay as a homeowner. They are generally calculated by taking the assessed value of your home and multiplying it by the tax rate that is determined by your local government. Any exemptions are then subtracted from your tax bill.
Finally, you also need home insurance. Home insurance covers personal property against losses from theft, fire, bad weather and other causes.
A mortgage transaction involves two main things: a promissory note and the mortgage (or deed of trust).
A promissory note, also known as a mortgage note, is a contract where the borrower agrees to pay the lender back the money borrowed plus interest. The borrower is responsible for paying back the loan even if the borrower later sells the property.
A mortgage or deed of trust acts as a lien on the property. The mortgage or deed of trust is the document that pledges the property as security for the loan.
What Happens If I Fail to Pay My Mortgage?
If you fail to pay your mortgage or deed of trust, your lender has a right to begin the foreclosure process. Whether you live in a judicial or non-judicial foreclosure state, you are given a grace period to pay your missed payment. If you do not pay your mortgage by the end of the grace period, your lender may report you to the credit bureau. You will also get a default notice and notification that foreclosure will begin on your property. If you are not able to pay off your missed payment plus interest in full by the time foreclosure begins, your lender or the courts will sell your home. Your lender is paid the remaining amount of the loan from the proceeds of the sale.
Different Types of Mortgages
The most common types of mortgages are fixed rate and adjustable rate mortgages. Under a fixed rate mortgage, the lender cannot change the interest rate during the term of the loan, which is typically 15 to 30 years. Under a fixed rate loan, the size of your monthly payment stays the same throughout the entirety of your term. Adjustable rate loans have an interest rate that changes or adjusts from time to time. Typically, the rate on an adjustable rate mortgage changes every year after an initial period.
In addition to fixed rate and adjustable rate mortgages, there are several other types of mortgages, such as jumbo, two-step, sub-prime, balloon, construction, among others. You may want to explore the option of using another type of mortgage as they may offer you various advantages based on your current financial situation. For instance, if you have bad credit, two-step mortgages may be the only mortgage you qualify for given your credit history.
Do I Need a Lawyer?
Buying and financing a piece of real estate can be one of the most burdensome financial endeavors you pursue. A real estate attorney can advise you of the different mortgage financing options. An attorney can also review any financial documents and advise you about your obligations and the best way to proceed.
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Last Modified: 03-23-2016 11:52 AM PDT
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