What is the literal meaning of the word Mortgage?
Mortgage derives from two Latin words, “Mortuus”, which means death and “Gage”, which means pledge. It’s safe to say that one is pledging until death to pay their loan.
Now let’s talk about what it actually is. A Mortgage Loan, also known as Home Loan, also known as a Mortgage, is a Loan from a financial institution or a bank granted to a borrower(s) to purchase real property. It is a legal document one signs when purchasing a home or refinancing a home. The borrower(s) are obliged to payback the loan for the predetermined set of payments. You’ll make regular monthly payments until you pay off the balance of your loan. If one does not pay their mortgage as agreed, it gives the lender the right to take back the property.
Mortgages consist of four main components: Principal Balance, Interest Rate, Taxes and Mortgage Insurance.
A loan’s Principal balance is the amount owed after you’ve already made payments against the original amount that was borrowed from the lender. For example, if you borrow $350,000 and repaid $50,000 dollars, towards the original amount, the remaining principal balance is $300,000. The more you pay off the loan, the more equity you gain on your property.
Tip: Financial savvy borrowers choose to pay extra payments towards the principal balance every month, called “prepayments”. Doing so, will allow you to pay off the loan sooner, gain equity on the property, and avoid paying too much interest. Just paying an additional $100 per month towards the principal of the mortgage reduces the number of months of the payments. A 30 year mortgage (360 months) can be reduced to about 24 years (279 months) – this represents a savings of 6 years!
The Interest Rate on your mortgage is the amount charged on top of the principal by a lender, to a borrower, for the money that was lent.
Homeowners Insurance is a type of property insurance, that is usually required by mortgage lenders, which covers losses and damages to an individual’s house and to assets in the home.
Mortgage Insurance is usually required on a Conventional Loan if your down payment is less than 20% of the purchase price of your home. Mortgage Insurance is typically required on FHA and USDA Loans. Mortgage Insurance is an insurance policy that protects a mortgage lender or a title holder if the borrower defaults on payment, dies or is otherwise unable to meet the contractual obligations of the mortgage.
What is a Promissory Note?
A Promissory Note is exactly as it sounds, a promise to pay back the money that was borrowed.