Understanding mortgages: a crash course
Team Simplist
Oct 2, 2019

You probably already know that a mortgage is the loan you need to buy a house when you don’t have several hundred thousand dollars of cash on-hand. You may or may not, however, know that the word “mortgage” originates from the Latin and Old French words for “death pledge.” Harsh? Yes. Thankfully, Simplist is here to transform your mortgage process from a death pledge into a fast, easy, getting-into-your-dream-house pledge. Let’s break it down.

Mortgage by definition

The definition of a mortgage is as follows, according to Merriam-Webster:

mortgage (noun): a conveyance of or lien against a property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms

In other words, a lender gives you the money you need to buy a property with the understanding that, should you fail to uphold your end of the agreement – i.e. making your monthly payments on time – the lender will take ownership of said property.

What is a lien, you ask? That’s the legal right a lender has to keep possession of a property until a debt is discharged.

As for the stipulated terms you’ll need to agree upon (and adhere to), those are things like the monthly payment, the type and percentage of interest rate you’ll be paying, and the length of the loan. Keep your payments current and keep your dream home. Once all the payments have been made, the bank no longer owns the home— you do! That’s cause for celebration indeed. But wait—there’s more?

Mortgage accoutrements

Get familiar with these mortgage extras. If the mortgage payment is the ice cream, these are the sprinkles, nuts, and the maraschino cherry on top.

Taxes

Property taxes must be paid every year in all 50 states. If these taxes remain unpaid, the local taxing authority (your city or municipality) has the right to file a high-priority tax lien on the property. If the tax remains unpaid, it may ultimately be foreclosed on and auctioned to anyone willing to pay off the tax obligation. That’s right: simply not paying, or forgetting to pay, the property tax on your home could result in someone else purchasing your home for a fraction of its cost — without paying off the mortgage!

For this reason, many lenders collect taxes along with your monthly payment and place it into an escrow account, paying the tax bill on your behalf at the end of the year.

Escrow

So, what is escrow? If you haven’t closed yet, you may hear your home categorized as “in escrow”. This is the period of time after your offer has been accepted but before closing. During this time, a neutral third party (generally a title company) holds your earnest money deposit, deeds, and other paperwork until closing.

An escrow account is simply a savings account established by your lender. This is where your lender places the funds allocated for property tax and insurance premiums. Wait, what insurance premiums?

Homeowner’s Insurance

This insurance policy covers everything from fires to storm damage and other catastrophes; it’s required by most lenders. You may take out this policy independently, or it may be included in your escrow account holdings. Either way, it’s important to know that it’s paid up and in place as part of a healthy mortgage.

Mortgage Insurance

This won’t apply to all mortgages, only those with skinny-ish down payments. If your down payment is less than 20% of the purchase price, generally your lender will require this policy. Again, it can be folded into your monthly mortgage bill, or you can take out the policy independently.

Know before you go

Now you’re familiar with some terminology and basic mortgage philosophy. Still have a question about a term we didn’t cover here? Check out our other blog posts and our comprehensive mortgage term glossary.

Think you’re ready to hit the diving board and swan dive into the deep end of the proverbial real estate pool? Simplist’s knowledgeable mortgage experts are the lifeguards at the pool, and we’re ready when you are.

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