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Len Penzo dot Com

The offbeat personal finance blog for responsible people.

What Is a Mortgage?

By Len Penzo

Readers: This is article 1 of 25 for my new no-nonsense “Mortgage Basics” quick-reference series.

mortgage basicsIn the simplest terms, a mortgage is a home loan that uses the property being purchased as collateral. If the homebuyer ever fails to make payments, the lender can foreclose on the secured real estate in order to recover the mortgage debt.

All mortgages consist of the following components:

  • Principal. This is the money required to purchase the property.
  • Interest. This is the cost of the mortgage, expressed as a percentage rate. Depending on the type of mortgage you choose, this rate can vary over time, or remain fixed for the entire loan period.

In addition, a mortgage may also include the following additional charges especially when the down payment is less than 20%:

  • Taxes. Property taxes and other local assessments may be included as part of your monthly mortgage payment, typically on a pro-rated basis.
  • Homeowners Insurance. This protects both you and the lender from any losses due to fire, theft and other property risks. This does not cover losses due to floods or earthquakes, however.
  • Private Mortgage Insurance. PMI provides the lender with additional default protection on mortgages. The good news is it can usually be discontinued after two years.
  • Flood Insurance. This is typically required for homes that are in designated flood areas.

Photo Credit: GotCredit

June 26, 2015

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Disclaimer

This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

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