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CHAPTER II -- BEFORE SHOPPING, BECOME AN EXPERT

LESSON 2: HOW MORTGAGES WORK

A mortgage is a long-term loan that a borrower obtains from a bank, thrift, independent mortgage broker, online lender or even the property seller. The house and the land it sits on serve as collateral for the loan. The borrower signs documents at closing time giving the lender a lien against the property. If that borrower doesn't make payments as agreed, the lender can take the home through foreclosure!

Because mortgages are such large loans, consumers pay them off over long periods of time -- usually 15 to 30 years. Their monthly payments gradually whittle away the principal balance.

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A monthly mortgage payment is sometimes called a PITI payment. That's because each one covers a portion of the following four costs:
Principal -- the loan balance
Interest -- interest owed on that balance
Real estate Taxes -- taxes assessed by different government agencies to pay for school construction, fire department service, etc.
Property Insurance -- insurance coverage against theft, fire, hurricanes and other disasters

Borrowers can choose to pay their real estate taxes and insurance in lump sums when they come due, rather than in monthly installments to their escrow accounts. We'll talk more about that in Lesson 12. Depending on the kind of mortgage a borrower has, the monthly payment may also include a separate levy for private mortgage insurance (PMI) or government-backed mortgage insurance premiums. We cover that in Lesson 5.

(continued on next page)

 

TABLE OF CONTENTS

CHAPTER I
  Lesson 1
  Quiz

CHAPTER II
  Lesson 2
  Quiz

CHAPTER III
  Lesson 3
  Lesson 4
  Lesson 5
  Quiz

CHAPTER IV
  Lesson 6
  Lesson 7
  Quiz

CHAPTER V
  Lesson 8
  Lesson 9
  Quiz

CHAPTER VI
  Lesson 10
  Lesson 11
  Quiz

CHAPTER VII
  Lesson 12
  Lesson 13
  Lesson 14
  Quiz

CHAPTER VIII
  Lesson 15
  Lesson 16
  Lesson 17
  Lesson 18
  Quiz

CHAPTER IX
  Lesson 19
  Quiz

CHAPTER X
  Lesson 20
  Quiz

CHAPTER XI
  Lesson 21
  Quiz

CHAPTER XII
  Lesson 22
  Lesson 23
  Lesson 24
  Quiz

CHAPTER XIII
  Lesson 25
  Lesson 26
  Lesson 27
  Quiz

CHAPTER XIV
  Lesson 28
  Lesson 29
  Lesson 30
  Quiz

Definitions




 
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