What is a Mortgage?
A mortgage is a loan you obtain to pay for a home and any land it sits on. The home and land is used for collateral on the loan, which means that if you don’t make your payments, the lender can take the home away to cover your missed payments. Most mortgages last 10 to 30 years but can be paid off sooner.
Principal and interest (PI) together comprise most of your mortgage payment.
The loan principal is the amount you actually borrow to purchase the home. Your initial principal is reduced by the amount you put towards the homes down payment.
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Interest is the amount the lender charges you to use their money; it is a percentage based on current economic indicators.
The amount of time you borrow the money, ten and thirty years, is called the loan’s term.
The total principal, interest and finance charges are then divided into equal payments over the life of the loan using a process called amortization. With amortization your payments mostly go toward interest early in the loan and then more goes toward the principal later in the life of the loan.
In addition to your principal and interest, your mortgage payment can include taxes, insurance. The acronym PITI can help you remember all the parts of your payment. It stands for principal, interest, taxes, and insurance. If you put less than twenty percent down payment on the loan, the lender may add monthly private mortgage insurance (PMI).
The property taxes are actually levies based on a percentage of the value of your home. In general, the taxes go towards financing the costs of running your community such as maintaining schools, roads and other infrastructure. If your taxes are not paid monthly with your mortgage payment then in California your property taxes are due twice a year.
If you put less than twenty percent down on the loan, the bank considers it a little riskier and may require an escrow account also known as impound account. An impound account is an account maintained by the bank to collect your insurance and tax payments. They pay your annual insurance and taxes from this account and collect money monthly from you through your payment to gather the required amounts.
If you have less than twenty percent down, your lender will probably also require you to include an amount for private mortgage insurance (PMI) in your payment. This protects the lender in case you don’t make your house payments, they repossess your house, and they have to sell it for less than the amount left on the loan. The PMI is then added to the required PITI amounts to make up your total monthly payment.
