| A mortgage is basically a long-term
loan that you arrange through a bank or other
financial institution, or even through the seller
of the property. The house and/or property serve
as collateral for the loan.
A home mortgage is most likely the
largest debt you will assume. You typically pay
off that debt in monthly payments over a long
period of time, most often 15 to 30 years.
What's in a payment?
A monthly mortgage payment typically includes
the following, known as PITI:
• Principal
• Interest
• Real estate Taxes
• Property Insurance and, often, private
mortgage insurance, known as PMI.
PMI gives the lender protection
if the homeowner should default on the loan. The
mortgage company charges insurance if the down
payment is less than 20 percent of the sale price
or appraised value. PMI usually can be eliminated
once the principal balance of the mortgage reaches
80 percent of the sale price or appraised value,
which is known as the loan-to-value (LTV) ratio.
The process of paying the principal
takes years because mortgages are based on a repayment
plan called amortization. During the years of
the mortgage, a homeowner pays a lot of money
toward interest in order to have manageable monthly
payments on the huge house debt. During the first
few years, most of the mortgage payments will
be applied toward the interest. During the final
years of the loan, the payments will be applied
primarily to the remaining principal.
Example
Let’s look at a $100,000 mortgage, at a
fixed interest rate of 7.5 percent, for 30 years.
In three decades, the homeowner would pay $151,717
in interest.
Of course, you cannot put a price
on the pleasure of living in your own home and
building equity, an unencumbered interest in your
property. Equity grows as you pay off the principal
of the mortgage and as the property appreciates
in value. Also, there are tax incentives, since
mortgage interest is a deduction on your federal
income tax.
Still, the amount of interest you
will pay may affect your decision on what type
of mortgage you choose. |
