What is a mortgage loan? A beginner’s guide to home financing

A mortgage is the loan that funds a home purchase for many buyers. Because a mortgage can involve decades of payments, fees and terms, it’s important to understand how it works before you borrow. Here’s what you need before taking out a mortgage.

A mortgage is a legal agreement that lets you borrow money to buy a home, with the property serving as collateral — meaning the lender has a legal claim to it until the loan is paid off.

“It’s what makes homeownership possible for most people,” says Debbie Calixto, a sales manager at mortgage lender loanDepot in Indian Wells, California. “A lender provides financing that you repay over time, so you don’t have to pay the home’s full purchase price upfront.”

When you take out a mortgage, you commit to monthly payments over a set term, often 15 or 30 years. Those payments cover principal, interest and often taxes and insurance (PITI). “If you can’t pay the loan, the lender will take the house,” says Roland Chow, a financial planner and portfolio manager at Optura Advisors, a wealth management firm in Burlingame, California.

A mortgage payment covers these components:

Principal refers to the actual loan balance — what…

Original source: https://www.usatoday.com/money/