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  • Writer's picturePatrick Aloisio

How Do Mortgages Work?

Updated: Jun 22, 2022


how do mortgages work

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Congrats, you just bought your first house for $100,000.


How can you do this without actually having $100,000 in cash? Mortgages!


First, you have to pay a percentage upfront as a down-payment at closing, 5% is the usual minimum for a homeowner. If it was an investment property that you don't live in, lenders normally require 20% or 25% as a down-payment.


Even though you’ve only paid $5,000 of the total $100,000 owed, the seller gets his full $100,000 from the mortgage company.


In exchange for the mortgage company paying on your behalf, they will charge you interest on the amount owed. Basically, mortgage is just the name for a loan that's specifically for a property.


You then make monthly mortgage payments to the mortgage company until it’s paid off. The most common mortgage length is 30 years, but you can do different lengths depending on your situation. A shorter length term will pay less interest over the long run, but the monthly payments will be higher.

how do mortgages work

The mortgage payment is usually made up of 3 parts. A portion goes towards the interest, the next portion goes to the principle amount owed, and the last part goes to your property taxes in an escrow account.


Here’s the catch, while mortgages make buying houses more affordable, you’re actually paying way more over the long run. At 4% interest, for our $100k house example earlier, you pay about $165,000 over the 30 years even though you borrowed only $95,000.


That’s how mortgages work, follow for more plain easy analysis!

 

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