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A mortgage is "the pledging of a property to a creditor as a form of security for the repayment of a debt." In basic terms, this is the legal contract that states if the borrower does not repay the loan back (as well as all of the costs and interest that are associated with it); the mortgage lender can repossess their house.
The lender will actually hold the title of the house until the debt is repaid in full, and the mortgage lender can then sell the property in order to obtain their money back if the borrower cannot make the mortgage payments.
When someone is looking at obtaining a mortgage, they may have to pay a deposit towards the mortgage loan simply because the majority of mortgage lenders will not offer a 100% mortgage. This deposit will be a lump sum which the borrower will pay up front and will potentially decrease the amount of money that they will have to finance. The borrower is able to deposit as much money as they want. Sometimes they can pay as little as 3 or 5% of the property purchase price. Though, the more money they deposit, the less the money that will need to be financed and the lower their monthly mortgage payment will be.
The actual mortgage payment will consist of:
Principal - This is the whole sum of money that the borrower is borrowing from the mortgage lender (after they have made their deposit). It is the sum of money that they are financing.
Interest - This is the sum of money that the mortgage lender will charge the borrower for obtaining the loan. It will be a percentage of the whole sum of money that they are borrowing.
Taxes – The money which is used for the borrower to pay their property taxes is generally put into an escrow account. This means that the money will be put in the hands of a 3 rd party until the time arises to pay the taxes or specific conditions are met. A part of the borrowers property tax will be added to their monthly mortgage payment and will be held in this escrow account until it is due.
Insurance - There are a number of different forms of insurance which can come into play when a borrower obtains their mortgage. They will have hazard insurance in order to protect them against any losses caused from problems such as a fire, storm, theft, etc. If the borrower’s property is in a flood risk area and they are obtaining a government insured loan, they will have to obtain extra flood insurance. They will also have to pay for private mortgage insurance (PMI) unless they have at least 20% equity in their home. This may sometimes be quite expensive, so it does make common sense to place as much money into their down payment as they possibly can. (The Equity is the part of their property’s value which they have already paid for.)
These parts of their mortgage payment are known as PITI. Other costs that the borrower will have to pay when obtaining a mortgage loan are also closing costs which will include solicitor fees, appraisal fees, land registry fees, transferring of deed ownership fees, origination fees and processing fees.
Mortgages are on average repaid with incremental payments which will gradually reduce the principal of the mortgage loan amount. This is known as amortization. The part of the borrower’s payment that pays the mortgage interest is a lot higher than the part that repays the principal - at least for the first number of years.
There are various types of mortgages available on the market today that a borrower is able to choose from. Which type they pick generally depends on the amount of time that they think they will be living in their home or any other financial obligations that they may have. If they think that they will be living there for the long haul, they may decide to obtain a fixed rate mortgage which has the lowest rate of interest that they can get.
There could also be other considerations. For example they may have children that could be going to college in 10 years. In this case, they may want to consider obtaining an adjustable rate mortgage, which will enable them to keep their payments at a low cost for the first number of years in order to let them put money aside for the college fees. After the children have finished at college, they will be able to refinance their mortgage at the current rate.
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