What is a Mortgage?
"A bank is a place that will lend you money if you can prove that you don't need
it." -Bob Hope
If you were Oprah Winfrey or Bill Gates, you could skip Chapters 5 and 6, which explain
everything that you need to know about mortgages. If you have enough money to pay cash for
your home, you can happily thumb your nose at bankers and other mortgage lenders. If you
can afford to pay cash for your home, who needs them?!
As for the rest us, we need to take out a mortgage to buy a home for the simple reason
that doing so is the only way we can afford a home that meets our needs. This chapter
helps all non-wealthy folk to comprehend mortgages and then choose one. (If you are
wealthy and have a great deal of money to put into a property, this part of the book can
also help you to decide how much of your loot to put into your home purchase.)
Start with the basics. What is a mortgage? A mortgage is
nothing more than a loan that you obtain to close the gap between the cash you have for a
down payment and the purchase price of the home that you're buying. Homes in your area may
cost $70,000, $170,000, or $370,000. No matter -- most people don't have that kind of
spare cash in their piggy banks.
Mortgages typically require monthly payments to repay your debt. The mortgage payments
are comprised of interest, which is what the lender charges for use of the money
you borrowed, and principal, which is repayment of the original amount borrowed.
Learning how to select a mortgage to meet your needs ensures that you'll be a happy
homeowner for years to come. You also need to understand how to get a good deal when
shopping around for a mortgage because your mortgage is typically the biggest monthly
expense of homeownership (and perhaps of your entire household budget). Paying more for
interest on your mortgage than you pay for your humble abode itself is not unusual.
Suppose that you borrow $144,000 (and contribute $36,000 from your savings as the down
payment) for the purchase of your $180,000 dream palace. If you borrow that $144,000 with
a 30-year, fixed-rate mortgage at 7 percent, you end up paying a whopping $200,892 in
interest charges alone over the life of your loan. That $200,892 is not only a great deal
of interest -- it's also more than the purchase price of the home or the loan amount you
So that you don't spend any more than you need to on your mortgage, and so that you get
the mortgage that best meets your needs, the time has come to get on with the task of
understanding the mortgage options out there.
This Homebuyers Tip was excerpted from
Home Buying For Dummies, by Eric Tyson, Ray Brown. © 1997 by Eric Tyson, Ray Brown,
used by permission of IDG Books.