What is a Mortgage?

According to Webster’s, a mortgage is "the pledging of property to a creditor as security of a debt.” In plain terms, it is the legal contract that says if you don’t pay the loan back (along with all of the fees and interest that are included with it), then the lender can have your house.

In states following the "title theory," the lender holds the title to your house until the debt is completely paid off, and the lender will sell your house in order to get the money back if you can't make your mortgage payments. In states following the "lien theory," the mortgagee holds a lien on your property and can foreclose said lien and sell your property in the event you default under the mortgage.

Your down payment is the lump sum you pay up front that reduces the amount of money you have to finance. You can put as much money down as you want, or you can sometimes pay as little as 3 to 5 percent of the purchase price. The more money you put down, though, the less you have to finance and the lower your monthly payment will be.
 

The mortgage payment is made up of:
 

• Principal - This is the total amount of money you are borrowing from the lender (after you've made your down payment). It is the amount of money you are financing.
   

• Interest - This is the money the lender charges you for the loan. It is a percentage of the total amount of money you are borrowing.
   

• Taxes - Money to pay your property taxes is often put into an escrow account, meaning that the money is placed in the hands of a third party until it is time to pay or certain conditions are met. A portion of your property tax is added to your monthly mortgage payment and held in escrow until it is due.
   

• Insurance - There are several types of insurance that can come into play when you get a mortgage. You'll have hazard insurance to protect against losses from fire, storms, theft, etc., and if your home is in a flood risk zone and you're getting a federally insured loan, you'll have to get flood insurance. Unless you have at least 20 percent equity in your home, you'll also have to pay private mortgage insurance (PMI). This can sometimes be pretty expensive, so it makes sense to put as much into your down payment as you can. (Equity is the portion of your home's value that you have already paid for.)

These pieces of your mortgage payment are referred to as PITI. There are also closing costs that you will have to pay.

Mortgages are typically paid off in incremental payments that gradually chip away at the principal of the loan. This is called amortization. The portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal -- at least for the first several years.
 

Mortgage Refinancing

There are many good reasons to refinance your existing home mortgage, equity line, or both. One example is for debt consolidation and/or home improvements. Eliminate all of the loose end debt you might have out there by refinancing it into your home mortgage, or home equity line/loan. Not only do mortgage loans typically offer lower rates than other financing options (credit cards, builder financing, etc) – the interest you pay on your mortgage and equity loans or lines of credit is also tax deductible for most people.

This can amount to an incredible savings! Another great example is – most people who buy a home end up with a 1st, and 2nd mortgage to start off with. Typically, the 1st mortgage is for up to 80% of the homes' value, and the 2nd mortgage covers the rest. This is done to avoid the expense of paying private mortgage insurance on the 1st mortgage due to exceeding 80% of the homes actual value. Generally the 2nd mortgage carries a higher interest rate, so it's a good idea to refinance everything into one 1st mortgage at a lower rate as soon as your total loans are 80% or less of your home’s value. It is also a common practice for lenders to offer lower rates when borrowers are below the 80% CLTV (combined loan to value) range also.
 

Some common uses of home equity are:
 

• Home Improvements

• Major Purchases (2nd homes, vehicles, vacations)

• Education (putting children through college)

• Debt Consolidation

• Investment Purposes

Product breakdown:
 

One of the most difficult decisions when refinancing your home mortgage or equity account is selecting the right product type. This guide should help you determine what type of loan would best meet your financial needs.
 

First Mortgage
 

Your first mortgage is your “big” loan. If you plan on living in your home for many years, and want to simply gradually pay down on your loan over time with regular monthly payments – you should look at a standard 30 year mortgage. If you are only going to be living in your home for a couple years, and have plans to sell – it's not worth your while to start paying on a 30 year fixed mortgage, because the early years of an amortized loan don't pay much towards the principal. You may be better off just getting an interest only 1st mortgage, keeping the payments as low as possible and applying extra to the principal when you have funds left over. This way, you won't throw away more money to interest than necessary.
 

Equity Loan
 

An equity loan is pretty straightforward by itself. A standard home equity loan can be paid on anywhere from 1 month, on up to 30 years – or longer if desired. They have regular monthly payments that bring the balance down over a set time schedule (amortization table). Equity loans can however get complicated. For example: If you are only planning on needing the equity loan funds for a short period of time, you may be tempted to get a balloon loan. This is a loan where you are typically allowed to pay a very small amount monthly, but have to pay the entire balance off in full after a short amount of time. Some are as short as 12 months, some as long as 15 years.
 

Equity Line
 

An equity line of credit is for the homeowner that frequently utilizes the equity in their home. It is simply an open line of credit, secured by your home. You get equity checks, and typically a debit card of sorts – and you then have full access to spend up to your credit limit, which you set when you get the home equity line of credit to begin with. Equity lines are convenient because they allow you to essentially lend yourself money without going through the entire loan process. You simply use the funds you need, and repay them as you are able to. Once repaid, the funds are then available to be used again. Equity lines typically carry variable interest rates, but most lenders now offer equity lines that give fixed rate options on outstanding balances as well – with both principal and interest, and interest only payment options available.