Understanding the Fundamentals

A mortgage is a type of loan specifically used to purchase real estate. When you take out a mortgage, you borrow money from a lender (usually a bank or credit union) to buy a home, and in return, you agree to repay the loan over time, typically in monthly installments. The property you’re buying serves as collateral for the loan. If you fail to make your payments, the lender can seize the property in a process called foreclosure.

Key Terms to Know:

1. Principal: This is the original amount of money you borrow from the lender to buy the property.

2. Interest: The fee charged by the lender for lending you the money. Interest is usually paid along with the principal amount in your monthly payments.

3. Down Payment: This is the upfront payment you make toward the purchase of the home, typically a percentage of the home’s price (commonly 3-20%). A larger down payment reduces the amount you need to borrow.

4. Loan Term: The duration of the mortgage, usually 15, 20, or 30 years. The longer the loan term, the lower your monthly payment, but you may pay more interest over time.

5. Monthly Payment: The amount you pay every month to repay the loan. It typically includes the principal, interest, property taxes, and homeowners’ insurance.

6. Fixed-Rate vs. Adjustable-Rate Mortgages: With a fixed-rate mortgage, your interest rate remains the same throughout the loan term. An adjustable-rate mortgage (ARM) has an interest rate that can change after an initial fixed period, potentially affecting your monthly payments.

7. Private Mortgage Insurance (PMI): If your down payment is less than 20%, you may be required to pay PMI, which protects the lender if you default on the loan.

8. Closing Costs: Fees and expenses paid when finalizing the mortgage. These can include application fees, appraisal fees, title insurance, and more.