1. Mortgage Rates
  2. Buying a Home
  3. What is a Mortgage

BUYING A HOME

What is a Mortgage?

A mortgage loan is a loan that a bank or lender gives you to help finance the purchase of a house. It is most advantageous to borrow approximately 80% of the value of the house or less. The house you buy acts as collateral in exchange for the money you are borrowing to finance the mortgage for a house. A mortgage payment is composed of four parts: principal, interest, taxes and insurance. It is normally paid on a monthly basic.

Principal

Principal is the total amount of money you borrowed to buy the home (e.g., If you have a $200,000 mortgage loan, the beginning principal balance is $200,000).

Interest

Interest is the price that you pay to borrow money from your lender.

Taxes

Taxes are the property taxes you pay as a homeowner. They are typically calculated based upon the value of your house.

Insurance

Insurance includes homeowners insurance and could include mortgage insurance (MI). You are required to get homeowners insurance by your lender to cover your house and possibly the property inside. If your down payment is less than 20%, you will have to pay mortgage insurance which protects the lender if you default on your mortgage loan.

Mortgage Note

When you get a mortgage you will sign legal documents known as a mortgage note that promise you will repay the balance of your mortgage, with interest and other possible costs over a set period of time.

If you default on your mortgage payments, the lender is allowed to take back your house and sell it. This legal process is known as a foreclosure.

Next Article   >   Understanding Mortgage Credit Scores
Get low rates anonymously from rated & reviewed lenders.
The affordability calculator is calculated based on the percentage of your income spent.
Use this refinance calculator to help you decide if refinancing makes sense for you.