Mortgage Basics

If you are trying to buy a new home and you don’t have a ton of cash stuffed in your mattress or you are not independently wealthy in some other way, you will need to obtain a mortgage to complete your new home purchase.

What is a mortgage?

The Merriam-Webster dictionary defines mortgage “as a conveyance of or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms”. A mortgage can also be “the instrument evidencing the mortgage, the state of the property so mortgaged” or “the interest of the mortgagee in such property.”

Some other definitions:

• A mortgage (French for “dead pledge”) is a device used to create a lien on real estate by contract. It is used as a method by which individuals or businesses can buy residential or commercial property without paying the full value upfront. The borrower (also called the mortgagor) uses a mortgage to pledge real property to the lender (also called the mortgagee) as security against the debt (also called hypothecation) for the rest of the value of the property. (en.wikipedia.org/wiki/Mortgage)
• Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan. (www.modern-woodmen.org)
• The pledge of a property to the lender as security for payment of a debt.
  (www.nations-mortgages.com)
• A written pledge of property that is used as security for the repayment of a loan.
  (www.stopforeclosure.com)
• A loan to purchase a home, where the property is used to guarantee repayment of the loan. (www.personal-finance.gbr.qc.com)
• A legal document by which real property is pledged as security for the repayment of a loan; the pledge is canceled when the debt is paid in full. (www.midfirst.com)
• A lien on the property that secures the Promise to repay a loan. (www.pueblo.gsa.gov)
• A loan for a house. Also referred to as a lien or claim against real property.
  (nwmservices.com)
• Legal agreement on the terms and conditions of a loan for the purpose of buying real estate. (A Mortgagee lends the money to a mortgagor, the borrower). (allhomes.com)
• A pledge of real estate as security for the payment of a debt. (www.naugatucksavingsbank.com)
• A document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.
  (www.equitytrail.com)

Components of a Mortgage Payment

There are typically four components of a mortgage: Principal, Interest, Taxes and Insurance, also known by the acronym PITI:

• Principal: The principal amount is the amount of the original mortgage loan and the monthly repayment of that loan
• Interest: The interest amount is the cost of borrowing the principal amount, which is usually repaid on a monthly schedule
• Taxes: Real estate taxes (also known as property taxes) are required of all property owners within a certain governmental jurisdiction(s) and are usually combined into the PITI (dividing the annual amount by 12) to help level monthly payments
• Insurance: Homeowners insurance on a home with a mortgage is always required by the lender and is usually combined into the PITI (dividing the annual amount by 12) to help level monthly payments. (Primary mortgage insurance (PMI), often required by lenders if the loan amount is greater than 80 percent of the value of the home, is another monthly expense you can incur).

One of the major reaons that the homebuying experience is fraught with anxiety and problems for millions of people is that they are not only buying a house, they are also wrestling with the mortgage process. For some folks — people with cash reserves, high-end incomes and perfect credit — obtaining a mortgage is easy, if they need one at all. For others, obtaining the right mortgage can make all the difference in not only being able to acquire a home, but also staying there as long as they want without financial worry.

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