Home buyers generally do not have the capital to purchase a home outright. As such, they seek to receive a loan, which is secured by a lien on the real estate, and they will reimburse the lender over a period of time. The home buyer will also owe the mortgage interest rate fees. The lender holds the deed of the property until the home buyer pays off the mortgage; thus, the deed is the collateral of the payment. As such, a mortgage in itself is not a debt, but instead it is the lender’s security for a debt.
Despite the lender owning the deed, the home buyer still occupies the property and has legal responsibilities of the property as though he owned it outright. Generally, home buyers acquire a mortgage by paying a down payment for a mortgage up front and then paying monthly rent. If the home buyer fails to pay the debt, the lender can take back the property and sell it to cover the debt.
The Mortgage Process
The homeowner has to borrow the principal to buy the home. Before the principal is financed, the homeowner must give a down payment, which is usually a small percentage of the home’s then market value, which in turn will be deduced from the total principal debt.
The lender charges the homeowner interest on the principal money. He can charge the homeowner points and other loans costs in addition to the given mortgage interest rate. The interest is financed along with the principal and every interest point is one percent of the total financed amount.
Amortization is the process of the monthly payments. Generally, a homeowner’s monthly payments are mostly interest in the early years under the amortization, which reduces debt over a number of years.
Homeowners have to pay various taxes on their property. Taxes help finance the cost of running communities and they fund schools, infrastructure, and roads. Property taxes are to be paid even after a mortgage is paid off as well, as in many communities, they are the biggest source of tax revenue for local public schools.
Most lenders require homeowners to have home insurance, which covers home and personal property from damages stemming from natural disasters, crimes, weather, fire, and so on. Having homeowner’s insurance is essential even if a homeowner does not pay with a mortgage, as the homes could require future repair should it be damaged or destroyed. Some insurance is required as well. For example, homeowners who purchase property that is located in federally designated high flood risk zone within a flood plain must have insurance should the homeowner sign for a federally insured loan to acquire the property.
When homeowners put less than 20 percent down on a purchase, most lenders also charge private mortgage insurance, which protects the lender, not owner, from the owner’s defaulting on the mortgage. After July 29, 1999, lenders must cancel this insurance after the mortgage balance shrinks to 78% of the home’s purchase price.