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WHAT IS A MORTGAGE? A mortgage is a long-term loan that a borrower obtains from a bank, independent mortgage broker, online lender or even the property seller. The house and the land it sits on serve as collateral for the loan. The borrower signs documents at closing time, giving the lender a lien against the property. If that borrower does not make payments as agreed, the lender can take the house and land through foreclosure. Because mortgages are such large loan amounts, consumers pay them off over long periods -- usually 30 years. Monthly payments gradually whittle away the principal amount. A monthly mortgage payment is sometimes called a PITI payment.Borrowers can choose to pay their real estate taxes and insurance in lump sums when they are due or in monthly installments to an escrow account. Depending on the kind of mortgage a borrower has, the monthly payment may also include a separare levy for private mortgage insurance (PMI) or government backed mortgage insurance premiums (MI). The breakdown of each payment (the amount that goes toward principal, interest, etc) changes over time because mortgages are based on a repayment formula called amortization. That is a term meaning the lender spreads the interest you owe on the mortgage over hundreds of payments so that the overall loan is as affordable as possible. Mortgage Terms and Definitions
Principal -- the loan balance
Interest -- interest owed on the mortgage balance
Real Estate Taxes -- taxes assessed by different government agencies to pay for schools, fire department service, police protection, etc.
Property Insurance -- insurance coverage against theft, fire, tornadoes and other disasters
Collateral-- property pledged as security for a debt
Closing -- the meeting at which the sale of a property is completed. The buyer signs the lender agreement for the mortgage and pays closing costs and escrow amounts. The buyer and seller sign documents to transfer ownership of the property. Also known as the settlement.
Lien -- a legal claim against property for payment of a debt or for services rendered. One who holds a lien has the right to sell the property to obtain the money, or to recover the money when the property is sold. Valid liens are filed with county recorder's offices.
Foreclosure -- the legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Escrow account -- an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.
Amortization -- the payment of a debt in installments over an agreed-upon period, during which principal and interest are paid off.
Mortgage insurance -- also known as MI or PMI (for private mortgage insurance). A policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Although mortgage insurance protects the lender, it is paid monthly by the borrower. Mortgage insurance usually is required if the down payment is less than 20 percent of the sale price.
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