What The Heck Is A Mortgage Anyway?

Well lets get down to basics ...real basic here. What the heck is a mortgage?

Well that questions was asked recently at Yahoo! Answers. And yes, the enquirer got a great, yet easy-to-understand answer from McJordanSr. Here it is:

A mortgage is a three-party promissory note. Here's how it works. A builder builds a structure, let's say a house, and wants to sell it for $100,000. You see the house and want to buy it, but don't have $100,000 cash, which is what the builder wants, even needs in order to continue building the home. At this point, no deal is possible, because you cannot afford to meet the builder's terms, and the builder cannot afford to meet your terms.
Enter the third party, a bank, or a mortgage lender, such as a Savings & Loan Institution. This third party says to the builder, I will loan the potential buyer $100,000 and pay it to you in a lump sum, thus meeting the builder's need. This third party says to you--the house-buyer--I will loan you $100,000 and pay it to the builder, on your behalf, if you will agree to the following:

1. Let me set the interest rate that I charge you for this loan

2. Let me set the term of the loan as long as I can, 30-years-for example.

3. Let me compound the interest monthly and establish the combined payments of Principal, Interest, Taxes and Insurance (PITI) each month.

4. Also let me establish other fees (closing, etc.) associated with making this deal viable for me, the lender.

You agree. Thus the mortgage is now established.

In a nutshell, that's a mortgage. A three-party promissory note that gets the builder what the builder needs--$100,000 in cash in this example; gets you what you desire--to move into this new house now, in this example; and the mortgage lender (bank, etc.) what he desires--the highest possible return on the loan.

Let's go a step further and look at what happens.

For the first 23 years of a 30-year mortgage period, more than 80% of the monthly "mortgage" payments go to pay compound interest. So let's say that you monthly payment is $1000 for 360 months (30 years), You agreed to pay $360,000 for a house with a retail value of $100,000.

Well, there's your answer.

Have a nice day

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