Each person or family dreams of having a home. Owning a property and living in one’s own house is everybody’s great American dream. If you dream of having your own place, you have to work at it because the reality is that buying a home or building one is a huge investment, and not everyone has the money to pay for everything in cash all at once. This is where mortgages come in. People fund their huge purchase with a home mortgage loan.
A mortgage is basically a loan. But unlike any regular loan, it is a big financial debt that, if mismanaged, could cost you your home. This is because the collateral for your mortgage is your property. If you are unable to pay your mortgage, the lender has the right to take your house and sell it in order to cover his losses.
When you pay your monthly mortgage fee, it includes 4 elements which are – principal, interest, taxes and insurance.
Principal – The principal is the amount of money that you borrowed. Generally, payment for the principal begins as small payments that increase in time. Mortgage payments are structured in such a way that most of your mortgage payments go to paying for the interest during the first few years. During the final years of mortgage payment, most of your mortgage fee goes to the repayment of the principal.
Interest – Typically expressed as interest rate, the interest is the amount charged by the lender. In a way, it is the lender’s reward for taking a risk with you. All in all, if the mortgage payment is high, the interest is high as well. But because of higher interest rates, this also limits the amount of money that a person can or wants to borrow. Naturally, if the interest rate is lower, you’ll also be more convinced to loan more.
Taxes – The amount you’ll pay in taxes often depend on the value of your home. Collected taxes go to infrastructure development and maintenance of schools, parks, fire stations, police departments, hospitals and other public facilities. After you are done with your mortgage payment, you will be required to continue paying for your property or real estate taxes. Usually, the government computes property taxes on a per-year basis. However, as a homeowner, you have the option of paying for your taxes per month, which is actually a good idea because you won’t have to be burdened of paying a lump sum at the end of each tax period.
Insurance – As a homeowner, you are required to buy home insurance so that in case there’s fire, flood or robbery, you are financially protected. Some types of insurance, such as flood insurance, are optional. It is, however, obligatory for a homeowner to have flood insurance if his home is located in a high flood risk zone. In case you reside in an area where devastating floods often occur, you are obligated by federal law to buy flood insurance in addition to home insurance.
So, these are the 4 elements included in your mortgage payments. It is vital that you keep up with your payments in order to avoid foreclosure and loss of investment.
Claire Campbell is a home improvement hobbyist and a freelance writer. She blogs about real estate issues, and she writes about these for Spokane Valley Washington home builders.