This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

How Do Mortgages Work?

When it comes to figuring out mortgages many people use the phrase, “it’s all Greek to me” but figuring out how mortgages work is actually quite simple.

First, a mortgage is a loan from a lender to a borrower to buy a piece of real property (a fancy way to say house, land, etc). The interest on the mortgage is the percentage of money the borrower agrees to pay the lender each year, in return for lending the money.

Here is where it gets complicated, the lender wants to loan to be affordable for the borrower so they spread the interest out over time. This is called amortization. Amortization is the amount of money that goes toward principal (the amount of the loan) and interest. This amount changes over time because the interest owed is spread over time.

Find out what's happening in Newtonwith free, real-time updates from Patch.

There is a booklet put out by the U.S. Department of Housing and Urban Development that explains the mortgage and interest process. You can find the booklet here.

Now often your payment is more than just the principal and interest. A monthly mortgage payment is often called a PITI payment. No, not pity even though you might need pity when looking at your loan statement. PITI stands for:

Find out what's happening in Newtonwith free, real-time updates from Patch.

Principal – the loan balance

Interest – interest owed on that balance

Real estate Taxes – taxes assessed by different government agencies to pay for school construction, fire department service, etc.

Property Insurance – insurance coverage against theft, fire, hurricanes and other disasters

There may also be other fees depending on the kind of mortgage you have. Your monthly payment may also include private mortgage insurance (PMI).

Remember there is a lot to know about mortgages beyond the rate so be sure to talk to a mortgage professional to make sure you fully understand your payment options.


We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?