How a Mortgage Works

Written by Samuel Phineas Upham

Mortgages are long-term loans that are granted by the bank to a borrower. Mortgages use the property and the land it sits upon as collateral for the loan. When a home sale closes, the buyer signs documents that essentially grant the lender rights to a lien on the property.

Mortgages can trace themselves back to the Great Depression, when the Federal Housing Administration first got its start making loans to the general public. Loans were not entirely unheard of before then, but most real estate transactions were all-cash. Today, consumers pay these loans off over a long period of time (usually 15-30 years).

Each month, the borrower is required to make a payment towards the loan. This payment, often referred to as PITI, covers all elements of the loan itself. The lender helps the borrower set up an amortization table, which describes where the money from each payment will go. The principle represents the full balance of the loan, not the purchase price of the house. So the principle is the loan minus the down payment. The user then pays interest on that remaining balance based on what the bank agreed upon with the borrower. There are also taxes on the property that the owner will always remain responsible for. The owner is also responsible for maintaining property insurance against theft, fire, hurricanes and other natural disasters.

Borrowers also have options for where their money goes. They can choose to pay off taxes and insurance in one lump sum, which helps reduce the monthly payment without affecting the mortgage balance.

Samuel Phineas Upham is an investor from NYC and SF. You may contact Samuel Phineas Upham on his Samuel Phineas Upham website