The Ultimate Beginner's Guide to Home Loans

What is a Mortgage?

A mortgage is a legally-binding document you sign when purchasing a property. Secured by the property itself, a mortgage allows the lender (usually a bank) to claim the property if you don’t repay the loan.

Signing a mortgage may be nerve-racking for a first-time buyer—and for good reason. (After all, "mortgage" comes from the Latin word for “death,” i.e. you’re stuck with this until the day you die, like it or not!) And sure, a mortgage represents a big commitment, often spanning 15 or 30 years depending on the life of the loan. But mortgages are also the simplest, most realistic way for the vast majority of people to buy a home. And if you choose correctly, your mortgage can be an affordable path to owning a home or investment property.

The 4 Elements Included in a Mortgage

So what are you signing yourself on to when you take on a mortgage? A mortgage commits the homeowner to monthly payments that typically encompass four items:

1. Principal

The principal is the actual amount of money you’ve borrowed. This doesn’t include the interest and other items below that are also wrapped into your monthly payment. As you pay your mortgage each month, part of that payment will go towards your principal.

2. Interest

Interest refers to the money you pay for the privilege of having a loan. Interest rates can vary based on several factors, including credit score, home price and loan amount, down payment, loan term, loan type, and more.

3. Taxes

Property taxes are often included in a mortgage payment. Your lender then keeps this money in an escrow account and pays it on your behalf when your tax bill is due.

4. Insurance

Property taxes are often included in a mortgage payment. Your lender then keeps this money in an escrow account and pays it on your behalf when your tax bill is due.

Mortgage insurance is required by the lender when you make a down payment of less than 20%. This includes private mortgage insurance (PMI, which you can read about more in Chapter 6) and insurance required for government-backed loans.

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nat...
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Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
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Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include
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