You have found a home you want to buy. What is the next step? Very likely you will need a mortgage loan to pay for your home. Most families do pay a good part of the purchase price of a home with a mortgage.
A mortgage is a loan contract. A bank agrees to provide the money you need to buy a certain home. You, in turn, agree to repay the money based on terms stated in the agreement.
The size of each payment depends on three things. The first is the amount of money you have borrowed. The second thing is the interest rate charged by the bank. The third thing is the number of years you need to pay the loan off. Under law, the contract has to state the amount of the loan, the interest you will pay, and the size and times of the payments. Any other charges made by the bank must also be included in the contract.
As the borrower, you must promise your home as security for the loan. It remains pledged until the loan is aid off. If you fail to meet the terms of the contract, the bank has the right to foreclose. Under the law, this means that the bank can take your home and sell it to pay off the loan.
Most mortgages are installment loans. This means that you are required to make a fixed payment – usually once a month. Part of the payment is kept by the bank to cover the interest charges. Part of it may be set aside by the bank to pay your taxes and insurance. And part of the payment reduces the principal of the loan. The principal is the actual amount that you borrowed.
In the beginning, most of each payment goes for the interest. As you keep paying, a smaller share of each payment is for interest and a larger share repays the principal. As your payments reduce the amount you owe on the principal of the loan, the interest charges are reduced.
You build up equity in your home as you pay off the mortgage. Equity is that part of your home which you own free from the bank. When the last payment on the mortgage is made, you will have full equity. The home will be completely years. The interest has been paid off. The principal has been repaid in full.