Many people have questions when they get a mortgage.  For some, they may wonder what type of mortgage to get or what mortgage terms like principal, down payment and mortgage insurance mean.  Wherever you are in the mortgage process, it’s important to get your questions answered and that is my goal in this video today.  Hello, my name is Michael Anthony O’Connor with Community Home Funding and today I am going to cover how a mortgage works.

Let’s begin by explaining what a mortgage means.

A mortgage is a real estate loan that allows a mortgage lender to loan money based on the value of the home.

The lender issues a note and deed and they hold the title to the home until it is paid in full.

The lender charges an interest rate on the money borrowed over typically a 15, 20- or 30-year period of time.

The amount of money borrowed is called the principal.

The lender will lend a percentage of the value of the home, based upon the loan program you qualify for.

The rest of the money paid is called a down payment.

A down payment is an up-front payment made when a home is purchased.

The down payment is the portion of the purchase price that is paid “out-of-pocket”.

Down payment funds typically come from personal savings or as a gift from a close family member.

The down payment covers a percentage of the total purchase price.

Mortgage Insurance or MI is required on most loans where less than 20% down payment is made.

Mortgage Insurance lowers the risk to the creditor of the loan so that the borrower can qualify for a loan that they may not otherwise be able to qualify for.

There are several different kinds of loans available with Mortgage Insurance.

There are two types of interest rates available, Fixed Rate Mortgages and Adjustable Rate Mortgages.

The most popular type of mortgage is the fixed rate mortgage.

In a fixed rate mortgage, the interest rate is fixed for the entire time of the mortgage.

It will never change, no matter what interest rates in the current market are doing.

An Adjustable Rate Mortgage, or ARM, is an interest rate that changes periodically.

This means that the monthly payment may change.

The monthly payment consists of a combination of principal, which is the amount of money borrowed and interest, which is the interest rate you agree to pay at the beginning of the loan.

The loan is paid off by making monthly payments against the principal.

Every time a monthly payment is made against the principal, it amortizes it.

Amortization is the process of spreading out a loan into a series of fixed payments over a period of time.

The monthly home loan payment remains the same every month, but the payment is made up of parts that change over time.

A portion of each of monthly payment goes towards:

• The Interest Cost
• The Principal

At the beginning of the home loan, interest cost is the highest.

Because a home loan is a long-term loan, the majority of the monthly payment is an interest expense and the monthly payment will only pay a small portion towards the principal.

So, basically, you will not be paying down a lot of principal during the early years of the home loan, or mortgage.

Over time, more and more of the monthly payment will go towards the principal and less will go towards the interest.

Homeowners are required to pay property taxes on their home.

The lender may collect property taxes and include them in the monthly payment.

This money is then held in an escrow account and the taxes are paid each year out of that account.

You will have to have Homeowner’s Insurance. The lender may collect the fees associated with the Homeowner’s Insurance in the monthly mortgage payment.  Just as in the case of property taxes, the Homeowner’s Insurance fees are held in the escrow account and are then paid annually to the insurance company.

There certainly is a lot to consider when getting a mortgage.  Make sure you are working with a licensed mortgage professional to get your questions answered.

Thanks for watching.

Michael Anthony O’ Connor
President
Certified Veterans Lending Specialist
NMLS# 254139
CA DRE: 01149902
(833) 444- 3464
www.michaelanthonyoconnor.com
Mike@Got-Funding.com