Introduction to Mortgages

What is a Mortgage?

A mortgage is considered a contract, which is a legally binding promise that is made to a bank, business, or person that loans you money for the purpose of buying a home. A mortgage contract will state that the money is being borrowed in order to buy the home or property, and that if for any reason you are unable to make your payments as the contract indicates, the home because the property of the lender. Another way to look at it is to consider a mortgage similar to a favor. When the mortgage company (bank or person or other lender) purchases a house for you, that’s the favor. You have to repay that favor by making monthly payments to the lender over a specified period of time. Of course, unlike a friend who doesn’t expect you to repay the favors they give you, the bank expects repayment for this favor, as well as additional money in the form of what is called interest.

Mortgages exist because most people do not have enough money in their pocket, piggy banks or investments to purchase a home in its entirety. Homes are typically the largest purchase a person will make in their lifetimes, and it is the rare few that can buy a home outright, without obtaining some sort of financing, or mortgage from a lender.

Mortgages provide many advantages. As you make your mortgage payments on time each month, you start to build up what is called equity. Equity is the amount of the house you own based on the amount of money you have paid towards your mortgage. For example, after a year, the outstanding balance on your mortgage will be less than the original amount of the mortgage loan. The amount that you have paid is the difference between the original amount of the loan and the outstanding balance. The amount you have paid is called equity. Often, banks and mortgage lenders will allow you to cash in your equity in order to consolidate your other debts, make large purchases that you maybe couldn’t afford otherwise (vehicles, college tuition, appliances) or to make improvements on your home.

There are risks associated with mortgages. What happens if you can’t repay your loan? In the worst-case scenario, if you are unable to make your payments for an extended period of time, the bank or mortgage lender can take your home away from you. This is called a foreclosure. So why do people take the risk when they could just live in an apartment that someone else owns, without the burden of a mortgage on their credit report? When people get married, or have children, they often want to move into a nice community where they can say, "I own a home".

When you rent from someone else, you are often limited to how you can decorate the home, and you certainly don’t want to spend much money fixing up something that doesn’t belong to you. Having a house that is your own is more than just a structure that you live in. This is where the term “home” came from! A home mortgage helps people realize their dreams of owning a home by providing the money that is necessary for purchasing the dream house.

You first mortgage is definitely a large investment, but does not need to be one that is made or avoided because of fear. There are loan officers, banks, and mortgage counselors available to answer your questions and work out the financial details with you. There are online mortgage calculators that allow you to punch in your personal finance information and decide how much of a home you can afford- or what you can’t afford! Taking time to research your options and have your questions answered will help remove the fear that may be associated with making such a large investment.