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What is a mortgage anyway?

In simple terms, a mortgage is a loan that is used to finance your house. In order to secure the loan, you have to enter into an agreement with a lender, or bank. The lender will give you the loan as cash up front, which you will then pay back over a set time span until the loan is paid in full.
Is there more than one part to a mortgage?

Yes! There are actually six parts to a mortgage: collateral, principal, interest, taxes, and insurance. Here's a breakdown:

  1. 1. Collateral
    When you enter into the legal agreement with a lender, your house is used as collateral for that agreement. If you fail to pay back the loan, the bank can actually take your house back through a process called foreclosure.
  2. 2. Principal
    The amount of money that the bank lets you borrow is known as the principal. To lower your loan's initial principal amount, you can apply more of your funds to the purchase price of the home, referred to as a down payment.
  3. 3. Interest
    The lender charges you for borrowing money from them. This is called the interest. It is typically expressed as a percentage, which is known as the interest rate.
  4. 4. Principal and Interest
    These will make up most of your monthly payments, which will reduce your debt over a fixed period of time.
  5. 5. Taxes
    When you buy a home, the local community collects property taxes based on a percentage of the home's value. These taxes usually go to helping the community with education, roads, and more.
  6. 6. Insurance
    Just like you have health insurance to cover you when you are sick, lenders will require you to buy homeowners insurance. This insurance typically covers natural disasters, fire, theft, etc.

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