#6 Understanding Mortgages: The Home Buying Adventure

Discover the Basics of What It Takes to Buy a House

Let us say that Sam is a kid with high hopes of owning a house one day. There is, however, a challenge – houses are quite costly. In this case, let us see how a mortgage helps people like Sam purchase a home.

What then is a Mortgage?

A mortgage is a loan especially for the purchase of a house, or rather it is a loan secured by a house. Whenever an individual wishes to purchase a house but does not have the house and cash at the same time, he or she can visit a bank. The bank then provides one with this cash and he or she obliges to repay it in installments (usually with some additional fee charged known as interest).

Let's dive into Sam's subject of interest:

Everyone wants a house at some point. So let us understand Sam's case:

1. The House Price: Sam spots a lovely home on sale for $200,000. That is a huge sum of money!

2. Saving Up: From his pocket money and birthday gifts, Sam has managed to set aside $40,000. This is known as a down payment. It is the portion of the house price which he can pay in cash.

3. Need for a Mortgage: Sam still requires $160,000 to purchase the house. And that’s why he has to get a mortgage! He goes to the bank and says, “This is the house I want to buy, but I need 160k, please help!”

4. Bank’s Offer: The bank is willing to advance in loan to Sam $160,000. They state that he must pay back the money in 30 years. They will also charge him some extra amount called interest. After all, this is how the bank earns from lending those funds.

Understanding Monthly Payments

Now, let’s analyze what happens after Sam is awarded the mortgage:

- Monthly Payments: Sam will pay the bank on a monthly basis. Let’s say his monthly repayment is $1,000. This payment consists of two parts:

- Principal: This is the exact sum of the loan that he secured ($160,000). Each month, a portion of the repayment goes to reducing this repayment sum.

- Interest: This is the additional sum that he pays to the bank for the extension of the loan. The bank applies the interest rate because they have given Sam a huge amount of money.

With each monthly payment that Sam makes, he is getting nearer to owning the house in full!

The Concept of Collateral and the Risk Involved

The bank expects to recover the entire sum lent out. Therefore, to shield themselves from any risk, they make use of the house as collateral. This implies that in situations where Sam is unable to repay the bank, perhaps due to job loss or other challenges, the bank has the right to repossess the house. Such a process is termed as foreclosure.

Becoming the Owner of the Property

Sam has to make every payment over the course of 30 years and that will settle the loan completely. Then, the house will be entirely owned by him! No further installments will be due and he can peacefully remain in his house without any anxiety concerning the bank.

Explanation

To put it simply, a mortgage is a financial instrument that allows individuals to acquire a house even when they do not have the total cash needed to pay for it. With banks lending portions of money to individuals, for instance, Sam, and allowing them to repay it in bits over time, the dream of owning a house can be achieved. The upmost elements of a mortgage are the down payment on the house, the monthly payment which is made up of the principal and interest and the foreclosure risk.

And there you have it medical moratorium explanation! Just imagine that it is a gigantic ovation that makes it possible to have a roof above one’s head.

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