How does a mortgage work?

Home Forums Mortgage How does a mortgage work?

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    Team StellarFi

    A mortgage is a loan you borrow to buy a home and agree to repay the amount with interest every month for a fixed period. There are four different parts to a loan repayment: principal, interest, taxes, and insurance.

    • Principal: This is the total amount of money you get from the lender which you pay back every month.
    • Interest: This is the percentage of the loan the lender charges for lending you the necessary funds. 
    • Taxes: Each month, you pay a part (1/12th) of the yearly property taxes based on the annual neighborhood assessment.
    • Insurance: Homeowners insurance protects your home against fires, theft, or accidents. Mortgage insurance is based on your down payment and loan type. This protects your home in case of default. 

    You pay off more of the interest than the principal during the initial years of your loan term. You get an amortization schedule that breaks down your monthly payments based on the dates, interest rates, and principal amount due each time.

    For your monthly taxes and homeowners insurance, lenders usually need you to have an escrow account if you pay less than 20% of the down payment. The funds in the escrow account pay off your insurance and taxes.

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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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