Mortgage debt in America is currently at the highest level in the country’s history.
Many homeowners have a limited understanding of how their mortgage is paid off, other than knowing the amount that leaves their bank account to pay it every month.
Understanding mortgages is easier than you might think. If you have a mortgage, you might benefit from learning a little about its payment structure.
Read on as we look at how your mortgage is paid off over its lifetime.
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What Goes Into a Mortgage?
Different mortgages will have different parts. Principal and interest make up the basic amount due for payment and feature in all mortgages.
Principal
The principal is the amount you borrow. If your house cost $500,000, and you get a 100% mortgage, your principal will be $500,000.
The principal will usually be divided evenly between all the repayments you make over the lifetime of your mortgage. An exception to this might occur if you have to restructure your mortgage at some point. In this case, you may pay only interest for a time, or a reduced amount of your principal.
Interest
Interest is the money your lender makes from your mortgage. They will charge a certain percentage of the principal amount and add this to your repayments.
The interest on most mortgages nowadays is compound interest. This means that the interest paid on the principal will decrease over time, as it is a percentage of a smaller overall sum.
For many people, compound interest is the component of their mortgage they find the most confusing. Engaging with it turns them off the process of calculating their repayments.
If this sounds like you, it might be an idea to use a mortgage calculator. GetCalculators.com has 14 mortgage calculators, as well as others for things like tax and insurance.
Mortgage Insurance
Private mortgage insurance (PMI) must be taken out on all homes where borrowers make a down payment of less than 20% of the overall value of the house, which protects lenders in the event of default.
PMI drastically reduces the riskiness of loans. This means that lenders can sell these mortgages, if they so require.
Lenders may also provide property insurance cover through mortgage repayments. This covers your property in the event of fire, theft, or some natural disaster.
Taxes
Real estate and property taxes are mandatory. They will vary from state to state.
These taxes do not have to be paid along with mortgage repayments. However, some lenders offer to pay taxes in this way for the convenience of borrowers.
The funds are held in escrow until the taxes are due for payment.
Understanding Mortgages Made Easy
While they can seem tricky, mortgage payment structures are easier to get your head around once you have some basic knowledge. Understanding mortgages can be a challenge at first, but it’s a good use of your time if you’re in the process of paying one.
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