What is a Mortgage Loan — Riddhi Siddhi Multi Services
When buying a home most of us don’t have the cash immediately available to simply buy the home outright, which results in the need for home loans. In order to secure a home loan lenders require the home to be put up as security, and the most common mechanisms for this is a mortgage. A mortgage is a loan that a bank or mortgage lender gives you to help finance the purchase of a house. It is most advantageous to borrow approximately 80% of the value of the house or less. The house you buy acts as collateral in exchange for the money you are borrowing to finance the mortgage for a house. A mortgage payment is composed of four parts: principal, interest, taxes and insurance. It is normally paid on a monthly basis.
Principal
Principal is the total amount of money you borrowed to buy the home (e.g., If you have a $200,000 mortgage loan, the beginning principal balance is $200,000).
Interest
Interest is the price that you pay to borrow money from your lender.
Taxes
Taxes are the property taxes you pay as a homeowner. They are typically calculated based upon the value of your house.
Mortgage Insurance
Mortgage insurance includes homeowners insurance and could include mortgage insurance (MI). You are required to get homeowners insurance by your lender to cover your house and possibly the property inside. Typically for conventional loans, if your down payment is less than 20%, you will have to pay mortgage insurance which protects the lender if you default on your mortgage loan.
Mortgage Note
When you get a mortgage you will sign legal documents known as a mortgage note that promise you will repay the balance of your mortgage, with interest and other possible costs over a set period of time. If you default on your mortgage payments, the lender is allowed to take back your house and sell it. This legal process is known as a foreclosure.
With a mortgage two parties are involved, the homeowner and the bank, and a loan is made directly from the bank to the individual with the home as collateral for the loan.
If payments aren’t made the bank can then initiate a foreclosure process, whereby they use the legal system to gain title over the home themselves. The bank would then typically re-sell the home to recover the value of the loan they initially made to the individual. Foreclosure homes are often sold via auction, as the bank want to recover their funds as soon as possible, and this can result in the home being sold at a significant discount.
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