Mortgage Help   Mortgage Rates Real Estate Credit Foreclosure Tax Mortgage Rates Mortgage Basics Chapter 1: How much house can you afford? Homeownership Should You Buy or Rent Summary   Chapter 2: Adjustable-rate mortgages ARM and a fixed-rate mortgage Fixed-rate mortgages Understanding the key elements Which type of lender is right for you? Other types of mortgages Subprime Summary   Chapter 3: Your credit score Down Payment How lenders set rates Low down payments Mortgage insurance Your mortgage payment Mortgage Points Summary   Chapter 4: The good faith estimate Inspection and Insurance Necessary paperwork for a buyer Other lender paperwork Paperwork and fees Prequalification and preapproval Special circumstances Summary   Chapter 5: Ten questions to ask Turned down for a mortgage Underwriting What lenders ask Summary   Chapter 6:  Understanding the closing process Escrow Summary   Chapter 7: When your mortgage is sold Avoiding foreclosure Paying ahead Payment changes Refinancing Removing mortgage insurance Summary How Mortgages Work: Understanding the key elements A mortgage is simply a long-term loan from a bank, thrift, independent mortgage broker, online lender or even the property seller for the purchase of a home. The property serves as the collateral for the loan. At closing, the borrower gives the lender a lien against the house and the land it sits on. The lien gives the lender the right to foreclose on the home if the borrower doesn't adhere to the mortgage payment arrangements. Mortgages are repaid over long periods of time - usually between15 to 30 years, though some lenders offer 40 year mortgages. Monthly payments in the beginning are mostly made of interest, only a small portion goes to the principal. Towards the end of the loan, your payments will be mostly principal and a little interest. Your monthly payment includes several things. When escrow is used, your monthly mortgage payment is referred to as PITI. There are four parts to your PITI payment: Principal - the loan balance Interest - interest owed on that balance Real estate taxes - the property taxes assessed by your county, city or school district Property insurance - insurance coverage against fire, theft, damage or natural disasters Many lenders require you pay your taxes and insurance in escrow with your monthly mortgage payment. This way, the lender is assured that your property taxes and insurance premiums are up to date. Though rare, a few lenders will let you pay these expenses yourself when they are due. Depending on the type of mortgage you have, you may have to pay private mortgage insurance as well. The amount of the payment that goes towards principal versus interest changes overtime due to a repayment formula called amortization. This results in the lender spreading your interest over the payments, keeping the monthly payments low. For example, on a 30-year fixed-fixed interest mortgage with an initial principal balance of $150,000 and a fixed interest rate of 7.5%, the payment amount is $1,048.82 each month. For the first 60 payments, over $880 of the payment goes to interest, with less than $200 going towards the principal. But on the last 60 payments, the majority of the payment goes towards the principal - over $800 - while the rest is interest. In total, the borrower will pay back $227,575.83 in interest. The majority of the interest is paid in the first years to keep the payments stable. The spreading out of the interest allows the borrower and lender to pay and receive a predictable amount of interest over the life of the mortgage.