How a Mortgage Works – Mortgage Facts
A mortgage is a loan, usually from a bank.
The main thing that makes a mortgage unique is that it is a large amount of money used to buy a house, a business building, a piece of land, or a farm.
Most people don’t have enough money on hand to buy those things outright and so they need help to do so.
They turn to a bank to negotiate a large loan.
The bank looks at the building or land you want to buy and calculates what it is worth.
The difference between the cost of your purchase and the amount of the mortgage the bank decides to approve is the amount you will have to have to complete the purchase.
This is the down payment.
Down Payment Example
If the house costs $200,000 and the bank approves a mortgage of $180,000, you will be responsible to pay a down payment of $20,000.
There are other costs that you will be responsible for as well, such as lawyer fees, registration fees, fire insurance on the building, extra bank fees.
What you need
You need a good credit rating so that the bank will consider you a good risk.
The bank considers your history of paying your loans, your employment and how much you make, and if you have other loans and obligations.
They will then have confidence that you will make the payments on time. The bank actually retains ownership of your purchase until the loan is paid.
Amortization
Because a mortgage is a large amount, most people want to have a low monthly payment with a long time to pay.
This is amortization – the loan is divided into equal monthly payments over 10, 15, 20, or 30 years.
The greater number of years the smaller the monthly payments will be.
The bank has to make money on the mortgage, and you are charged interest every month for the privilege of borrowing the money for the mortgage.
PIT
PIT is principal, interest, and taxes. To make things easier for the borrower, the bank will combine the three amounts into the monthly payment.
The amount of the mortgage is called the principal. Many banks combine only the principal and the interest, and the taxes are left for you to pay each year when it is due.
There are mortgage calculators online for you to use to calculate your monthly payments for principal and interest for whatever amortization you specify.
Types of Mortgages
The banks have a number of mortgages and each type depends on how the interest rate is calculated. One type is a fixed rate mortgage where the interest rate never changes.
Another type is an adjustable rate where the interest changes from month to month.
Another choice that the borrower has is to set the length of time for the interest rate, such as a 5-year fixed rate or a 5-year adjustable rate.
Quiz Time!
QUESTIONS
Why do people need a mortgage?
What do you need in order to apply for a mortgage?
What is amortization?
What does PIT stand for?
What are two types of mortgages?
ANSWERS
People need a mortgage to buy something big that they cannot pay for all at once.
You need a job, a good credit rating, and enough money for a down payment.
Amortization is spreading the loan over many years to make the monthly payments lower.
PIT stands for principal, interest, and taxes.
Two types of mortgages are a fixed rate mortgage and an adjustable rate mortgage.
