Nov 07, 2017

Ah, mortgages.

They may save your neck if you want to buy a house or a property. But they maybe the reason you’d have to declare bankruptcy.  They’re the pinnacle of American lending. They are  also the cause of the 2008 financial crisis. For some, mortgages are a relief and  for others, they’re a recipe for disaster.

There’s so much to learn, know, and understand about mortgages.  Unfortunately, you would need to navigate the labyrinthine passages of lending and borrowing while avoiding pit falls and encountering fiscal jargon every step of the way. We can’t make you an expert on mortgages, but we can offer you enough to master the basics.

Besides, if you have to pay your mortgages for the next 30 years, you need to be sure of what exactly you need to pay and why exactly you need to pay it.

Defining mortgages

To put it simply, mortgages are loans you borrow on a long-term basis to purchase a house or other real estate.  You can borrow a lump sum amount and pay it back in periodic payments over a long period of time.  The most common kinds of mortgages are 30-year loans.

The nature of the deal you get on a mortgage depends on your credit rating and a host of other factors. When it comes to the repayment, you need to obviously pay the principle amount you borrowed. But you also have to pay an additional amount, called the interest, which acts as a kind of reward for the lender or as a price for the financial risk they take when they let you borrow.

Your house or property serves as collateral. This means, in case you fail to repay the mortgage, the bank or lender can sell it to get their money back. 

The key terms

When calculating mortgages, there are a few key terms you need to wrap your head around. How much you’ll pay at the end of the day depends on the following four factors:

1. Principal

Simply put, the principal is the amount you originally borrowed. Mortgages are structured in a way that the principal payments are small in the beginning and gradually increase with each installment.

2. Interest

In the beginning of the repayment, what you primarily pay is the interest. The interest rate is directly proportional to the size of the mortgage payment and, generally, inversely proportional to the amount you can borrow. The higher the interest, the higher the amount you need to pay back and, most probably, the lower the amount of money you can borrow.

3. Taxes

Like most other financial transactions, taxes play a huge role in the amount you need to ultimately pay. The government usually calculates the taxes on a yearly basis but you can pay them as part of your monthly payment.

4. Insurance

Another key component of your monthly payment is the insurance. There can be many kinds of insurance but two deserve your attention. The property insurance is what protects your home and its contents whereas the private mortgage insurance becomes mandatory if your down-payment is less than 20 percent of the total cost. 

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