Anatomy Of a Mortgage

There are certain signposts in the road of Life that most of us see as we continue down the path. These signposts fall under the usual suspects such as falling in love, getting married, having children and starting a family, etc. The signpost that most of us see whether we start a family or not is owning our own home. Some of us are lucky enough to have the capital available to purchase a home outright while a vast majority of us end up taking out a loan for the home. This loan for the home is called a mortgage and there are many kinds of loans that fall under this umbrella called a mortgage.

The word “mortgage”

Why the word “mortgage” and not the words “home loan”? Who’s Mort and why does he have a gauge? These are somewhat valid questions to ask and the reason for this particular word is steeped in history. The very word “mortgage” is taken from a term from Law French language in the Middle Ages in Britain. This term meant “death pledge” and is in reference to a death of a pledge (pledge conclusion) with two outcomes. The two outcomes to a death pledge were fulfillment of the original obligation or foreclosure of the property that was used as collateral.

Basic process of a mortgage

The process of obtaining a mortgage is the same no matter which kind of mortgage is being sought. The borrower seeks out a lender or a bank to obtain the funds needed for the purchase of the home. Dependent on which lending institution is used and the borrower’s financial situation, a down payment and/or a co-signer is required to obtain the mortgage. Most down payments on a house fall below the 20% equity of the home and this brings up PVI (Private Mortgage Insurance) which we’ll cover below. The terms of the mortgage are then agreed upon, these terms cover the length of the mortgage and the interest rate and monthly payments required during the term of the mortgage. Once the terms are agreed upon and the lender supplies the money to the Realtor or home owner for the home, the buyer “closes” on the home and they become the new owners of the home.

Mortgage terms and living with the home “on loan”

Your name may be on the house’s deed as the homeowner, but you don’t technically “own” the home as long as you have a mortgage on it. This is why your home is technically “on loan” as long as you’re making a mortgage payment. There is a signature from the lender at the bottom of the deed as a lien holder on the property. What this means is that the lender has a lien on your property and they can exercise this lien if certain terms of your mortgage are not met. These certain terms are in relation to keeping up with your monthly payments on the mortgage. If you fall behind in your payments, your mortgage will end up in arrears and this basically means that you’re in “catch-up” mode on your mortgage payment schedule. If you don’t bring the mortgage out of arrears and fall behind even more, the lender can foreclose on your property. That’s where the lien comes into play as it’s a legal document giving the lender legal rights to take your property due to non-payment.

Private Mortgage Insurance

As mentioned previously, PVI comes into play in most conventional mortgages when your equity (money paid towards the principal of the mortgage) is below 20% of the home’s value. In most cases, this insurance is an additional premium placed on your regular monthly insurance payment to your lender. This insurance is in place to protect the lender from high risk borrowers and the higher chance of having the loan defaulted. Once the equity in the mortgage reaches 20%, the PVI premiums are lifted from your monthly payments.

Conclusion

There are different types of mortgages available to fit to almost any budget or family situation. Having a sizable amount of money saved up for a down payment is the best course of action when you’re looking for a new mortgage on a property. Having this down payment puts you in good position to not have to pay PVI premiums and having a good size of equity built up from the start. This equity can provide emergency money down the road should you need it in the form of a home equity loan.

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