William Telish

to purchase a property. The borrower will then pay back the loan, with interest, over a set amount of time. This is likely the largest debt any individual will take on. It is important to note that a mortgage is made up of several parts, including the collateral the buyer uses to secure the loan, the principal and interest payments and finally the taxes and insurance on the property.

How Do Mortgages Work?

A mortgage is essentially an agreement between the lender and borrower to lend the money in exchange for the purchase of a property. Few people can afford to pay cash for a property. The mortgage allows the buyer to repay the loan of a long period of time so it is affordable.

The process is fairly simple. A mortgage lender loans a specific amount of money that will be repaid in a set amount of years at a set interest rate. The borrower must typically provide a down payment of 5 to 20 percent of the purchase price. The borrower will apply for the loan, qualify and receive the loan. They will then be indebted to the lender until the loan is repaid or refinanced by another lender.

During the repayment process, the property will act as collateral in exchange for the mortgage. If the borrower does not make the proper mortgage payments or fails to make them on time, the lender has the right to repossess the home, a process known as foreclosure. Home owners who wish to sell the home before the end of the mortgage will use the proceeds of the sale to pay off the remaining mortgage debt.

How Long are Mortgage Terms?

Most mortgages, or the total loan amount including interest, will need to be paid off in 30 years or the borrower risks foreclosure. 30-year mortgages will be paid off monthly in equal amounts until the balance is zero. Once the loan is repaid, the borrower will have full ownership of the property. There are other, though less common, mortgage terms including 15-year, 20-year, 40-year and even 50-year loan programs. However, the 30-year amortization mortgage is by far the most popular and most common.

What is Amortization?

Amortization is a term that refers to how the mortgage is paid off. Your mortgage payments will be distributed monthly and include interest and principal for the duration of the mortgage term.

What is Equity?

Equity is the difference between the balance of the mortgage and the value of the property. You can access equity through the sale of the property, refinancing or a home equity line of credit.

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a special type of insurance home owners must buy if they are unable to put the full 20 percent down. It is designed to protect the lender from the borrower defaulting on the mortgage. PMI payments must be made for two years until the mortgage balance shrinks to 78 percent of the original purchase price.