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Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#36 - Mortgage Made Simple


Mortgage

Many industries have their own specific terminology. It can honestly sound like a foreign language to those not working in that field. Like when my wife tries to tell me about "triage." Or I say something about "Fannie Mae" and my wife thinks I am talking about chocolate (full disclosure I think she was joking).


This post is dedicated to simplifying the complex- specifically mortgages.


Let's start with Investopedia's definition: "A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments."


In other words, if you want to purchase a home but don't have enough money, a bank may give you the money you need to buy the home. The bank requires you to pay back that money and an additional amount of money (interest). This is called a loan, and specifically, this would be a mortgage since it is a loan on your home (a type of real estate property).


Oftentimes individuals will pay their property taxes and insurance as a part of the mortgage payment. This is called escrow. You are not actually paying your property taxes and insurance directly at the time you make your mortgage payment. That additional escrow money is being held in a separate account and then the property tax bill and insurance are paid for you from that account by the mortgage servicer.


Refinancing is when you get a new mortgage to pay off the old mortgage. This can make sense for a variety of reasons but is typically done when people are trying to lower the interest rate on their mortgage. 


Refinancing is receiving a particular amount of media attention now as mortgage rates have gone down. See the 30yr mortgage rate chart from YCharts.


For those of you with a mortgage, it would be worth checking with your lender (and a few other lenders for comparison) to see if you can receive a lower rate. You have to balance the costs associated with receiving the new loan with the savings on the new mortgage.


This was admittedly an oversimplification, but hopefully, that oversimplification also brought a little clarity to the word mortgage.

 

Interesting Article(s) or Video(s)


  • Link to the IRS's online tool for tracking the individual stimulus payments.


  • What actually happens if you refuse to complete the census? The American Bar Association weighs in.


  • This is so incredible. An anonymous donor sent gift cards to every household in Earlham, Iowa.

 

Thank you for reading! Is there any financial concept you would like me to expand on?

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