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Home Buying Basics

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Buying a home can be one of the biggest challenges of your life. It involves a lot of time and money, so the decision to buy shouldn't be taken lightly. You'll need to understand the very basics of buying a home and all of the steps involved. Once you understand the home-buying process, you'll be in a much better position to own the home of your dreams.

What is a Mortgage?

Perhaps the most important aspect of buying a home is getting, and paying, a mortgage. According to Dictionary.com, a mortgage is "a conveyance of an interest in property as security for the repayment of money borrowed." This simply means that when you take out a mortgage, the bank is letting you borrow money to purchase a home, with the home itself as the collateral.

Over the next 15 or 30 years, you'll be making monthly mortgage payments in which you're essentially paying the bank back for the loan. If you fail to make the required monthly payments, the home will be foreclosed and under the ownership of the bank that gave you the loan. If you stay in the home long enough, you'll eventually have paid off the entire mortgage, and the home will be yours for as long as you want it.

Dissecting Your Mortgage

Since a mortgage is such a big part of owning a home, it's worth exploring them more in depth. A mortgage has four main components, as outlined below:
  • Principal Amount - The principal amount of the loan is the total amount of money that you borrow from the bank. The principal will also include the extra charges for processing the loan and completing all the necessary paperwork.

  • Interest Rate - The bank doesn't just give you a loan for free; they need to make a profit off the money they let you borrow. The interest rate is a percentage of the loan tacked on to your regular payments. For instance, if the interest rate is 8% for a particular year, you'll have to pay back 108% of the loan amount.

  • Monthly Payment - The bank you get the loan from will prepare a schedule for you to pay them back. Also known as an amortization schedule, monthly payments are comprised of a fraction of the loan amount as well as the interest that has accrued on the loan.

  • Mortgage Term - When you attain a loan, the bank will stipulate the number of years it will take for the loan and interest charges to be paid. This time period, which is usually either 15 or 30 years, is considered the term of the mortgage.
These are the basics of taking out a loan to buy a home. Of course, each person's individual experience with their mortgage may differ. For instance, you might decide to refinance, take out an additional mortgage, or move out of the home before the mortgage is paid. Whatever the case may be, you can read through our other guides to get more information about many other areas regarding mortgages.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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