How Home Mortgages Work
Mortgage is the pledging of property to a creditor as security for the payment of a debt, usually a loan of money.
A mortgage is not a debt. It is the creditor’s security for a debt. The mortgage is a security for the loan that the lender makes to the borrower.
It is a transfer of an interest in property from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied.
The property (house and land) serves as collateral for the loan. The borrower signs a mortgage contract that give the lender (creditor) a lien against the property. In simple terms, it is a legal contract that says if the borrower doesn’t pay the loan back (principal plus interest), then the creditor seizes the property through foreclosure.
Mortgages are repay over long periods, commonly 15 or 30 years. The mortgage loan is amortized or broken down to monthly payments including principal and interest. The early payments are mostly interest costs and later payments are mostly principal. The money lenders set it this way because the interest is their profit and they want to get pay first.
Mortgage interest rates come in several varieties:
- Fixed rate mortgage loan the rate and your monthly payment remains the same for the life of the loan.
- Adjustable rate mortgage loan the interest rate changes based on economic indexes. The monthly payment amount can go up or down.
Mortgage loans come in a variety of types, including conventional, non-conventional, jumbo loan, fixed and variable-rate, home equity loans, and interest-only.
Monthly payment on mortgage loan generally include the following: Principal, Interest, Real estate Taxes, Home Insurance.
Some lenders require property taxes and home insurance to be paid into an escrow account. This protects the lender from tax liens and uninsured losses that the borrower can’t repay. You should negotiate with your lender to pay property taxes and insurance on your own without an escrow account. This way you can save money and have leeway on your cash flow.
Mortgage Loan Amortization
Amortizing loan is where the principal of the loan is paid down over the life of the loan, according to an amortization schedule.
Each payment to the lender will consist of a portion of interest and a portion of principal. Mortgage loans are typically amortizing loans.
Below is an amortization table of how principal and interest change over the life of a loan.
Example of a $200,000 home loan for 30-Year Fixed Rate at 5%, a borrower pays $1,073.64 monthly and total interest costs $186,511.57 for the full term.
| Payment Number | Monthly Payment | Principal Paid | Interest Paid | Principal Balance |
| 1 | $1,073.64 | $240.31 | $833.33 | $199,759.69 |
| 2 | $1,073.64 | $241.31 | $832.33 | $199,518.38 |
| 3 | $1,073.64 | $242.32 | $831.33 | $199,276.06 |
| 4 | $1,073.64 | $243.33 | $830.32 | $199,032.74 |
| 5 | $1,073.64 | $244.34 | $829.30 | $198,788.40 |
| … | ||||
| 356 | $1,073.64 | $1,051.55 | $22.09 | $4,250.21 |
| 357 | $1,073.64 | $1,055.93 | $17.71 | $3,194.27 |
| 358 | $1,073.64 | $1,060.33 | $13.31 | $2,133.94 |
| 359 | $1,073.64 | $1,064.75 | $8.89 | $1,069.19 |
| 360 | $1,073.64 | $1,069.19 | $4.45 | $0.00 |
