Mortgage Basics

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How mortgages work: Understanding the key elements

A mortgage is a long-term loan that a borrower obtains from a mortgage broker.

The house and the land it sits on serve as collateral for the loan. The borrower signs documents at closing time giving the lender a lien against the property. If that borrower doesn't make payments as agreed, the lender can take the home through foreclosure.

Because mortgages are such large loans, consumers pay them off over long periods -- usually 15 to 30 years. Their monthly payments gradually whittle away the principal balance, slowly at first then rapidly toward the end of the loan.

What's in a payment?

When escrow is used, a monthly mortgage payment is called a PITI payment. That's because each one covers a portion of the following four costs:

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