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Home Loans: What You Need to Know About Mortgages 
 
by J. Edward Casteele July 08, 2005

A guide to mortgages, including different types of mortgages and descriptions of mortgage terms and qualifications.

Buying a home or property can be a huge investment, and if you’re like most people it’s an investment that you can’t pay for out-of-pocket. As you may be aware, that’s where a mortgage comes into play… but do you really know what a mortgage is? Sure, it’s a loan on a house or other piece of real estate, but there’s a lot more to it than that.

Mortgages come in a variety of types and time spans, and can be used to either purchase a new home or piece of real estate or to secure additional money using that real estate as collateral. The implications of this are pretty straightforward… you get the money, but if you don’t pay it back then that house or property belongs to the bank. Of course, it’s not entirely that simple… but what else is involved in getting a mortgage?

Basics of a Mortgage

When buying a house or any other piece of real estate, there’s a good chance that you’ll have to finance the purchase through a bank or other lender. Chances are they’re not going to lend you the entire amount that you need (though occasionally you can find one that will), so the first thing that you’ll need is a down payment. The down payment is the amount of money that you’re going to pay personally for the real estate, and reduces the amount that you’ll have to borrow in your mortgage. The larger your down payment, the lower your payments will be (because you have less to pay back), though in a lot of cases your down payment can be as low as 5% of the total value of the property or less.

Once you’ve decided upon your down payment, you’ll apply for a mortgage to cover the rest. The mortgage will, of course, have to be paid back… and the bank or loan company will figure out the amount that you have to pay for each payment using a system known as PITI.

Principal

The principal is the total amount of the loan, and is calculated by subtracting your down payment from the final price of the property. Obviously, the higher your principal is the more you’ll have to pay back, so a higher down payment creates a lower principal and therefore lower monthly payments.

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