A mortgage is a loan that allows you to pay for a house without having hundreds of thousands of dollars on hand. A mortgage has a down payment which is the portion of the house that you are paying for at closing. Principal is the amount of the mortgage that you owe to the lender, and interest is the amount of money you are paying each month to the lender for letting you borrow their money.
- A mortgage loan is the biggest and longest IOU one can ever acquire because you have to pay the loan monthly over several years.
- The down payment is the money one puts down on the house to show the lender that you are committed to the loan.
- The principal is the amount of money one is borrowing and must pay back, and is calculated minus the down payment.
“Since you probably don’t have hundreds of thousands of dollars lying around, a mortgage loan makes it possible to purchase real estate by fronting you the money.”