 TITLE: What Is a Mortgage and How Does It Work? CONTENT: When you purchase a home, a mortgage loan allows you to finance the price of the sale minus any cash you bring to the table in the form of a down payment.\nIn turn, you agree to repay the money you borrowed to the mortgage lender over 10, 15, 20 or 30 years. While you're making payments, the lender holds the deed to the home.\nThis means that if you stop making payments, the lender has the right to take possession of the house, otherwise known as foreclosure. But if you make all your payments on the loan, you'll receive the deed for the home when you pay the loan in full.\nYour monthly mortgage payment typically has three components, including:\n*   **Principal**: This figure represents the actual amount of money that you still owe on your loan.\n*   **Interest**: This is the finance charge based on the loan's annual percentage rate (APR).\n*   **Escrow account**: This involves adding your property taxes and homeowner's insurance to your monthly mortgage payment. It is usually optional, though some lenders may require it in certain situations. The extra amount is held in an escrow account until the property taxes and insurance are due, then the lender pays them out of that account.\nOne hard part of the mortgage process is running into several terms that you're not familiar with. Here are some of the more common ones, along with their definitions:\n*   **Down payment**: The cash amount you contribute to the sale. Lenders often require a down payment of at least 3% to 5% of the sale price, but many buyers aim for a 20% down payment.\n*   **Closing costs and fees**: These are paid when you finalize the sale and purchase of the home. They can vary based on location, type of loan and what type of property is involved, but typically are 2% to 5% of the purchase price. You can either pay them in cash, roll them into the loan, or ask the lender to pay them in exchange for a slightly higher interest rate.\n*   **Loan term**: How long you have to repay your loan. Usually, the length of a mortgage loan is 10, 15 or 30 years.\n*   **Property taxes**: This is the amount you pay to your local, county or state government each year based on the value of your home and property. Tax rates can vary depending on where you live.\n*   **Foreclosure**: When you fail to make payments on time, your mortgage lender has the right to take ownership of the home unless you make the necessary payments.\n*   **Private mortgage insurance (PMI)**: This insurance protects the lender in case you default on your loan obligation. It's generally required by lenders if your down payment less than 20% of the total original loan amount. END