A mortgage is a loan to finance the purchase of a home, and it is probably the largest debt you'll ever take on.


It is a legal contract you sign to promise that you'll pay the debt, with interest and other costs, typically over 15 to 25 years, with your home as the collateral.
If you don't pay the debt, the lender has the right to take back the property and sell it to cover the debt; this is called repossession.
To repay the mortgage debt, you make monthly instalments or payments that typically include the principal, interest, taxes and insurance, together known as PITI.

Principal: The principal is the sum of money you borrowed to buy your home. Before the principal is financed you can give the lender a sum of cash called a down payment to reduce the amount of money that you borrow.

Interest: Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrowed.

Principal and interest comprise the bulk of your monthly payments in a process called amortization, which reduces your debt over a fixed period of time. Each payment includes both an interest payment portion and a principal payment portion. With amortization, the interest payment portion is higher in early years and principal payment portion is higher in later years.

In addition to your principal and interest, your mortgage payment could include mortgage insurance and property taxes.

Mortgage Insurance: Generally, if your down payment is less than 20 percent of the loan, your lender considers your loan riskier than those with larger down payments. To offset that risk, the lender insures the mortgage with Mortgage Insurance Company, and the cost is rolled into your monthly mortgage payment. The coverage doesn't protect you, it protects the lender from you defaulting on the mortgage. Without the coverage, many buyers could not otherwise afford to buy a home.

Taxes: The taxes are property taxes your municipality levies based on a percentage of the assessment value of your home. The tax is generally used to help finance the cost of running your community, e.g., to build schools, roads, infrastructure and other needs. You must pay property taxes even after your mortgage is paid off.

Insurance: Lenders won't let you close the deal on your home purchase if you don't have home insurance, which covers your home and your personal property against losses from fire, theft, bad weather and other causes. Even if you pay cash for your home, you should buy home insurance unless you can afford to repair or rebuild your home if it's damaged or destroyed.
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