How Do Mortgages Work? A Quick Guide

The word “mortgage” can mean  “confusion” if you’re not familiar with the subject, but it’s not as complex as it seems. While we recommend speaking with an accredited lender to get all your questions answered and advise you on your specific situation, we’ve put together a quick reference guide with basic information to get you started on the topic:

What is a mortgage?
A mortgage is a loan where your house is collateral, or the thing that you pledge to a lender as security for repayment of a loan. In most cases, a lender (a bank or another source) loans you a sum of money which you must pay back with interest, over a set amount of time. 

Key mortgage terms

  • Amortization: Mortgage payments are split into two portions—one pays the principal, the other pays interest. Your lender will provide an “amortization schedule” that shows the breakdown of these payments.
  • Annual percentage rate: The annual rate charged for borrowing money. It’s expressed as a percentage that represents the actual yearly cost of the money borrowed.
  • Closing costs: Expenses in addition to the sale price of a home.
  • Down payment: This is the amount that you pay up-front to a seller before your mortgage payments.
  • Escrow: The Balance explains escrow in simple terms as using a third party (somebody who is neither the buyer or seller) to hold something of value. In the case of a real estate transaction, a buyer may write the earnest money check out to the escrow holder (the third party), who will hold on to the funds until it’s time to either refund the money, apply it to the purchase price, or pass forfeited funds on to the seller.
  • Foreclosure: According to Zillow, foreclosure is when a homeowner fails to pay their mortgage. In foreclosure, the homeowner loses all rights to the property.

How is a mortgage calculated?
Lenders use a standard formula to calculate your mortgage payments, but you can get an idea with tools such as NerdWallet.

Still have questions about mortgages or the buying or listing process? Get all of your questions answered by the experts at Cheng Real Estate Group. Give us a call today at 608.957.2683.