What is a Mortgage

What is a Mortgage

Image from American Advisors Group

In layman’s term, a mortgage is a loan that you can use to finance large purchases of real estate properties like a home, for example. However, this is not how simple a mortgage is all about. In fact, having a mortgage can either lead you to bankruptcy if you fail to manage your debt properly. To help you understand deeper about mortgage, you might as well know that it is composed of several aspects. These facets of mortgage include the collateral that is used for the loan to be approved, the principal amount loaned, the interest and payments, taxes, and insurance.

Basically, a mortgage loan will not happen without the presence of collateral. This is how the loan is secured by credit companies. That is why when you apply for a mortgage loan to purchase a home, you agree to the terms that your home is made collateral. Failure to pay the required payment terms can result to foreclosure where credit companies will take your home and sell it to secure the debt. When this happens, it will create a double impact on your end. One is you lose your home, and the other is you ruin your credit score, which will totally affect your future loan applications.

Moving on to the other aspects of mortgage, the principal refers to the entire amount of money which you used to purchase a home. If you have part of the money, it is encouraged that you put that as a down payment to at least reduce the upfront principal amount. This way, it will be easy for you in repaying the debt since the interest will not be as high compared to not having made a down payment at all. Usually though, credit agencies will require you to put a down payment of at least 20% of the total purchased home value. Every month, you will have to pay a fraction of the principal amount including the interest rate. This monthly amortization can eventually reduce the principal amount thereby reducing the interest percentage as well. You should avoid late payments to avoid penalties and credit rating damages.

Added to the principal amount and the interest that you have to pay, taxes will also be included. The amount of tax you will pay depends on the value of the home you purchased. These taxes will also be stated on your monthly amortization balance statement.
In addition, credit companies will not likely approve your loan to purchase a home if you don’t get a home insurance. That is why you have to consider getting one first before applying for mortgage. Home insurance give security for lenders and credit companies in the event that fire, natural disaster, and other untoward incidents damage your home. As federal law dictates, you must even secure a flood insurance of your home is within the area with high risk of flooding.