3 Things to Keep in Mind on Mortgages

The term “mortgage” is commonly used to describe the financing arrangement between a homeowner and a bank. For example: “Who is your mortgage with?” “Do you think your bank will give me a mortgage?” But, what exactly is a mortgage, and what should you know about them? Here is some useful information to help you before taking on your next loan.

What’s a Mortgage?

Mortgage quite literally means “death pledge” in French. Do we really make such a solemn promise every time we purchase or refinance a home? Yes, and no. While sitting at the closing table staring at the ominously large stack of papers may make you feel like you are signing away your life, really you are agreeing to accept a really big check (the promissory note) in exchange for collateral (the mortgage).

As the homeowner, you are giving the bank the right to use your property to make good on the debt if you default. The bank gives you money, and you give the bank the peace of mind in the form of a mortgage.

My mortgage is 20+ pages, do I need to read all of it?

For a variety of reasons, most residential lenders use a standardized mortgage forms. For many people, this may be the single longest legal document they will ever encounter. But no matter how many pages it is, the mortgage boils down to this simple concept: You pay, you stay; you don’t, you won’t.

Insurance and Taxes

Three of the biggest risks for the bank in loaning money on real estate are: taxes; hazards (such as fire); and the borrower’s failure to payback the loan. This last risk is hedged by the bank’s ability to foreclose. Therefore, it is not surprising that two other important aspects of the mortgage deal with taxes and property insurance .

Often banks will require borrowers to pay into an escrow account every month 1/12th of the real estate taxes for the year. The bank will then take on the burden of paying the city the taxes when due. This gives the bank satisfaction that it will be done. Similarly, the bank will want to make sure your property insurance is paid up. They may even escrow for insurance payments as well. It is recommended that you discuss with your bank how they plan to handle taxes and insurance payments so you know exactly what you are paying for.

** FYI ** A lender CANNOT require you to use one insurance company over another.

Every state in the US has its own laws that govern mortgages; you should consult a licensed attorney before entering into a mortgage.

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