Deconstructing a Mortgage

The word, "mortgage", can elicit a sense of mystery and dread, especially if you've never had one.  The important thing to remember is that a mortgage is simply another word for a loan, even though it's often the largest loan you'll ever have attached to your name.  

Whether it's to buy a waterfront condo at the Lake of the Ozarks, or to buy a second home, a mortgage is often needed to seal the deal. Let's break down the important parts of a mortgage that you need to understand before purchasing a new home.

What is a Mortgage?

A mortgage is a loan, typically used to purchase a house or condo, that's it. It's essentially an agreement with a lender (usually a bank) to lend you the money to purchase a property, assuming you meet their qualifications.
Qualifications
Everything from the income you earn to the debt you owe goes into determining whether you qualify for a mortgage. Savings accounts and other assets are also taken into consideration. The idea is to make sure that you can actually afford the monthly payments of the loan you are applying for.

Basic Elements of a Mortgage

A mortgage consists of several elements - collateral, principal, interest, taxes, and insurance. Each is an element of the payment plan created between you and the lender and they all have equally important parts. 

Collateral

If a mortgage is a legally binding contract promising to repay money (loan) plus interest and other costs, then the home that you want to purchase becomes the collateral. The lender will hold the home in their "possession" (in name only, you'll live there) until you finish your payments. If the payments are not completed or stop before they are complete, the lender will attempt to sell the home in order to cover what you still owe in a process known as foreclosure. This is an incredibly damaging situation - especially to your credit and ability to buy a home in the future. This is why it is so important for the bank to determine your ability to make the monthly payments before your mortgage will be approved.

Principal & Interest

These two element go hand in hand. The Principal is the actual amount of the loan you borrowed from the lender. Depending on your down payment, this amount can be significantly less than the actual price of the home. Many lenders require a down payment equal to 20% of the purchase price, however there programs available that enable to you obtain a mortgage with a down payment that is significantly less. (Talk to your mortgage lender to see if you might qualify for any of these.) Interest is how the lender makes money. This is the amount they charge you for borrowing money. It's usually a shown as a percentage called the interest rate. Additionally, there are points. Points are each worth 1% of the total financed amount and goes alongside the principal.

Amortization

If you amortized (set a fixed payment plan) your mortgage, the interest will make up most of your early payments, and slowly work into the principal over the duration of the loan. This helps keep the payments even throughout the life of the loan, and keeps the interest from increasing over time.

Taxes

Taxes are ownership fees that are paid to the government. The amount here is based on a small percentage of the overall value of the home or condo. If the property increases in value annually, the taxes will increase as well. The taxes you pay go to helping the community directly such as maintaining roads, public schools, and public services.

Insurance

Insurance is the amount of money paid to protect your home from loss, and it will be required by your lender. There are several types of insurance and what you are required to carry will depend on a couple things. Some types are mandatory based on the property location, and some are based on the lender's specific requirements. 

As you can see, your mortgage has several elements. It's important to understand that each plays a significant role in the purchase of a home or condo. It's paramount that you understand how the pieces fit together when considering a mortgage. Thankfully, if you're purchasing a condo at the Lake of the Ozarks, we have you covered. Our team is friendly, and we can guide you step by step through the mortgage process so it's not overwhelming or confusing. 

Buying a luxury condo at Lake of the Ozarks has never been so easy!

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