11. What Does a Mortgage Cover?

by Local Title

A mortgage is a loan specifically designed to help individuals purchase real estate, typically a home. While most people understand that a mortgage covers the cost of buying property, it’s essential to recognize the various components that make up a mortgage and what it covers.

Principal and Interest

The primary purpose of a mortgage is to cover the principal amount, which is the actual cost of the property being purchased. Over the life of the loan, borrowers repay this principal amount plus interest, which is the cost of borrowing the money. The interest rate can be fixed or variable, affecting the overall repayment amount.

Property Taxes

Property taxes are levied by local governments based on the assessed value of the property. These taxes are often included in the monthly mortgage payment through an escrow account. The lender collects these payments and disburses them to the appropriate tax authority when due. This ensures that property taxes are paid on time and helps homeowners manage their annual tax obligations without large, lump-sum payments.

Homeowners Insurance

Homeowners insurance is typically required by lenders to protect the property against damage and loss. The insurance premium is often included in the monthly mortgage payment through an escrow account. This insurance covers a range of risks, including fire, theft, and natural disasters, providing financial protection for both the homeowner and the lender.

Private Mortgage Insurance (PMI)

If a borrower makes a down payment of less than 20% of the home’s purchase price, the lender may require private mortgage insurance (PMI). PMI protects the lender in case the borrower defaults on the loan. The cost of PMI is added to the monthly mortgage payment until the borrower has built enough equity in the home, typically reaching 20% of the property’s value.

Additional Costs

Mortgages can also cover other costs associated with purchasing a home. Some loans may include closing costs, which are fees related to the processing and finalizing of the mortgage. Additionally, certain mortgages might cover homeowners association (HOA) fees if the property is part of a community with shared amenities.

In summary, a mortgage covers not only the principal and interest on a home loan but also property taxes, homeowners insurance, and potentially private mortgage insurance and other associated costs. Understanding these components helps homeowners manage their finances and plan for the full scope of homeownership expenses.