What is a mortgage?
A mortgage is a loan used to finance the purchase of your home. A mortgage is made up of the collateral you’ve used to secure the loan, your principal and interest payments, taxes and insurance. A mortgage is a legal contract promising to repay the loan plus the growing interest on the loan. If you miss payments or refuse to repay the debt, the lender has the right to take back the property and sell it in a process known as foreclosure, to cover the debt.
In a mortgage, the payment consists of the principal and the interest. The principal is the amount of money borrowed to buy your home. The lower the principal amount is depends on your down payment. The more money provided in your down payment, the lower your interest rate will be. Typically, 20 percent of a home’s purchase price is the average down payment. If this percentage is considered too high for you, you’ll need to apply for a high-ratio mortgage. It will also be mandatory to purchase the Mortgage Default Insurance (please see question #39) to protect you, since the chances of defaulting on the mortgage payments are greater.
In addition to the principal and interest, your mortgage will also include taxes. The taxes are known as property taxes. The property taxes cover the community levies and are calculated from the value of your home. The tax goes towards running your community by maintaining and building schools, roads and other infrastructures.
The additional costs in a mortgage would be from insurances purchased. Typically, lenders won’t allow you to close a deal on your home without insurance. There are many types of insurances available and some mandatory depending on the location of your property. It usually covers your home and personal property against losses from fire, theft, bad weather and other causes.