Readers: Welcome to the first article in my new “Mortgage Basics” series, where I aim to provide clear and concise information on mortgages.
In simple terms, a mortgage is a loan that enables individuals to purchase a home by using the property as collateral. If the homebuyer fails to make their mortgage payments, the lender has the right to take possession of the property in order to recover the debt.
All mortgages consist of several key components:
- Principal: This refers to the amount of money needed to buy the property. It represents the actual purchase price.
- Interest: The interest is the cost associated with the mortgage, expressed as a percentage rate. Depending on the type of mortgage chosen, this rate may either fluctuate over time or remain fixed for the duration of the loan.
Additionally, when the down payment is less than 20%, a mortgage may include the following additional charges:
- Taxes: Property taxes and other local assessments may be included as part of your monthly mortgage payment. These are typically calculated based on a pro-rated basis.
- Homeowners Insurance: This insurance policy protects both the homeowner and the lender from potential losses resulting from fire, theft, and other property risks. It’s important to note that flood and earthquake damages are not covered under this insurance.
- Private Mortgage Insurance (PMI): PMI offers the lender an extra layer of protection against defaults on mortgages. The good news is that PMI can often be canceled after two years.
- Flood Insurance: Homes located in designated flood areas generally require flood insurance to protect against potential damages caused by floods.
Throughout this series, I will delve into each component of mortgages in more detail, providing you with a comprehensive understanding of this complex topic. Stay tuned for the next installment!