How a Mortgage Works
A mortgage is a loan associated with real estate, where the property being purchased acts as the collateral for the loan. This means that the property is the security for the loan, so that if the borrower fails to make the payments, the lender can acquire and sell the property to regain the money lent. This use of the property as collateral is a big part of what keeps mortgage rates lower than that of a credit card, for example.
Principal (P) – The portion of your payment that goes toward the principal balance (the remaining amount due) of the loan
Interest (I) – The portion of your payment that goes toward interest
Taxes (T) – The portion of your payment that pays your property taxes each year
Insurance (I) – The portion of your payment that pays your homeowners insurance policy each year
Mortgage Insurance (MI) – The portion of your payment that goes to the mortgage insurance company; mortgage insurance is not paid on all mortgages