Mortgage

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The official meaning of a mortgage is an agreement that a borrower (the mortgagor) gives a lender (the mortgagee) in return for the lender giving a loan for the purpose of buying property. The mortgage agreement gives the lender rights (called a lien) to the property in case the borrower defaults on the loan. However, in everyday language when people say they are getting a mortgage, they mean they are borrowing money to buy property. The person borrowing usually has a long time to pay back the loan, normally from fifteen to thirty years. The loan is typically paid back in monthly repayments, although sometimes the repayments are every two weeks. These repayments will include interest on the loan, repayment of part of the principal, and typically an additional amount to pay for any property taxes. A significant benefit of having a mortgage is that, in general, interest payments made on mortgage debt of under $1,000,000 are tax-deductible (2011). This has helped encourage people to own property rather than rent it. In the past, most lenders would not lend the entire price of the property, requiring that the buyer contribute some money, typically 20% of the price. This contribution from the buyer is known as a down payment. However, lenders frequently accept a down payment of less than 20% and sometimes even offer "100%" loans, which means that the buyer need not contribute anything. If the buyer does not make a down payment of at least 20%, the lender may require the borrower to purchase private mortgage insurance. When the loan is finally repaid, the lender typically has no more rights to the property and the lien is therefore removed. A lender could be a bank, a credit union, a savings and loan association, or a financial institution that specializes in selling mortgages. Mortgages can be fixed rate mortgages, adjustable rate mortgages, interest-only mortgages, or option mortgages. Historically, most mortgages were fixed rate, but in recent years buyers have been attracted by the lower initial cost of adjustable rate mortgages, and these types of mortgages now account for a much larger share of the market. You can usually prepay the loan (pay it off early) if you suddenly acquire some money or (more usually) if you decide to refinance. Normally there is no penalty for prepaying but sometimes there is, so you should read the fine print of the mortgage agreement carefully. Here is an example of some of the numbers involved with a mortgage loan. If you get a thirty-year fixed rate mortgage for $100,000 at an interest rate of 7%, your monthly repayments will be $665.30 for every month of those thirty years. At the beginning most of that $665.30 will be interest payments (in the very first month, the interest charges will be $583.33 and the amount of the principal that you repay is only $81.97). By the end of the loan period, most of the monthly payment will be principal (in the very last month of the mortgage, the final payment will consist of only $3.86 in interest and $661.44 in principal). The total amount of interest you will pay over thirty years on the $100,000 loan is $139,508.90. That's in addition to having to repay the $100,000 principal. The process by which the loan amount is gradually reduced over the loan period and then finally paid off is known as amortization. See also Deed of Trust, Foreclosure, Loan-to-Value Ratio, Mortgage Broker, Mortgage Life Insurance, Option Mortgage, Negative Amortization, Negative Equity, Piggyback Loans, Preapproved, Refinancing (Mortgage), Reverse Mortgage, and Second Mortgage.