How Does a Mortgage Work?


Quick Answer

With a mortgage, a lender issues money to a buyer for a home purchase in exchange for a guarantee of repayment of principal and interest, according to Bankrate. The loan is issued upfront and the borrower repays it with monthly payments for a stated period of time.

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Full Answer

The most common mortgage repayment periods are 15 and 30 years, according to Bankrate. The longer the repayment period, the smaller the monthly payment. However, extended loan periods also mean more interest is paid since the principal balance falls at a slower pace. The typical down payment to get a conventional mortgage is 20 percent. About reports that a person can get a loan with a smaller down payment, though mortgage insurance is normally required.

Until a borrower repays the mortgage, the lender holds a lien against the property. Once the loan is repaid, the homeowner takes possession outright. In addition to principal and interest, many homeowners make monthly installments toward home insurance and property taxes with their mortgage payments, according to Bankrate. The total monthly payment amount is known as PITI, which represents principal, interest, taxes and insurance. In most cases, a homeowner can claim a deduction from mortgage interest when itemizing deductions on a tax return, reports the IRS.

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