Grown-up Basics Part 1: What is a mortgage?

QUEZON City, Philippines (Eagle News Service, June 29) – Mortgage has its origin from the an ancient French legal term used in the Middle Ages. Literally, it means “death pledge”. Scary, right?

You are a grown-up now, and living in the adult world means handling things like mortgages. So here’s a helpful guide to mortgage basics.

When you want to build or purchase your own home, you may consider getting a mortgage. It is a loan taken to finance such a huge endeavor. A mortgage may be the largest loan that you’ll ever take on – you will end up paying for it for 15 to 30 years of monthly payment, so it is not something to enter into lightly.

To understand what a mortgage is, we must learn about its parts.

The first part of the mortgage is the collateral. Agreeing to a mortgage usually means that you sign a contract promising to repay the loan plus interests and other costs. Usually, your home is the collateral for the loan. What does this mean?

It means that if you fail to repay the debt, the lender can take your home and sell it to pay back for the loan. This is known as foreclosure. You should avoid this because not only will you be homeless, your credit rating will be damaged also, making it hard for you to get another mortgage for a new home.

The next part of the mortgage is the principal and the interest. The principal is simply the sum of money you borrowed to buy your home. It is advisable to lower this amount up front by paying a percentage of the principal as down payment. The usual practice is to pay 20% of the principal as down payment before you get your mortgage.

On the other hand, the interest is the amount charged by the lender for the use of the money you borrowed. It is usually expressed as a percentage, which is known as the interest rate.

It is these two, the principal and the interest, that will make up the bulk of your monthly payment, which is called amortization. Amortization is a process of reducing your debt, first by paying off the interest, and later on by paying off the principal.

The third part of the mortgage is the tax. In addition to the principal and the interest, you will also have to pay taxes also known as a property tax.

Finally, there is insurance. Lenders usually don’t allow a mortgage unless you first purchase a home insurance which covers your home against losses like fire, theft, bad weather and other causes.

Photo courtesy: haparealty.com

There you have it! These are the things that you should consider before taking on a mortgage to build the house of your dreams.

(ENS, written by Jay Paul Carlos)

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