| How home loans work | | | | on your own. |
| Most of us understand the advantages of owning a | | | | Principal: The total amount of money that you are |
| home versus renting one. However, we also know | | | | borrowing from the lender is referred to as the |
| that it would be extremely challenging to arrange for | | | | principal. Usually the principal is the cost of the house |
| the finances without some help. And so we decide to | | | | minus the share that you are paying (down payment). |
| borrow money from banks and mortgage lenders, in | | | | Interest: Why would the lender bother to lend you |
| order to fulfil our dream of owning our homes. Here is | | | | money? To earn interest, of course. The interest is |
| a guide to help you understand basic concepts of | | | | basically an amount over and above the borrowed |
| home loans: | | | | amount, that you are paying to the lender in monthly |
| Mortgage: A mortgage is basically the pledging of | | | | instalments in addition to the principal you are returning. |
| property to a creditor as security for the payment of | | | | The interest rate is usually decided at the time of |
| a debt (Webster). Essentially, when you take the loan, | | | | finalizing the mortgage arrangements - it can be fixed |
| you agree to let the lender hold the title to your house | | | | or variable. |
| until the debt is completely paid off. You are also | | | | Taxes: You are required to pay property taxes - the |
| empowering the lender to sell your house in case you | | | | amount for this is often set-aside in an escrow |
| can't make your mortgage payments. | | | | account. What this means is that the money is placed |
| Paying for your house includes arranging for the down | | | | in the hands of a third party until it is time to pay or |
| payment, the mortgage payment (which consists of | | | | certain conditions are met. A part of your property tax |
| the principal, the interest, taxes, and insurance - | | | | is added to your monthly mortgage payment. The |
| referred to as PITI), and closing costs. | | | | amount is then held in escrow until it is due. |
| Down payment: This is the lump sum you pay upfront | | | | Insurance: Insurance can be of different types - hazard |
| - you are required to pay some of the money for the | | | | insurance (to protect against losses from fire, storms, |
| house from your own savings. The greater the | | | | theft), flood insurance (if you live in a flood risk zone), |
| amount you can arrange for the down payment, the | | | | and then there is the private mortgage insurance or |
| lesser the amount you have to borrow - this translates | | | | PMI that you will have to pay (if you have less than 20 |
| to lower monthly instalments. Typically, you need to | | | | percent equity in your home). |
| arrange at least 3 to 5 percent of the purchase price | | | | |