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.