If you are a prospective home buyer trying to figure out how to finance your new home, surely you have heard about mortgages and other home finance products. You have probably heard a number of things about home loans, from which companies are good and bad, to what types of mortgages are available, to what the current interest rates are or when they will rise. You may need to go back and understand the basics before you can comprehend what all of these facts and figures mean.

First, a mortgage is a loan for real estate. It is just like a loan for college or an auto loan, except it is for your house, condo or town home. If you are buying a new home and do not have enough money for the whole thing at once (which most people don’t) then you will need to purchase a mortgage.

In return for the loan, you pay the lender interest, which can vary depending on the market and the type of loan you choose, along with discount points you pay up front and other influential factors. You usually pay the interest back on a regular basis each month, and, according to the life of the mortgage you obtain, in a set number of years you will be required to have paid back the entire loan along with the interest for the loan. In the rare case that you were unable to pay off the loan, the lender would be able to seize your property or take the home equity you have acquired.

Each month when you make your mortgage payments, you will pay both the principal and interest. As mentioned above, you need to pay back the amount of the loan given to you as well as extra money to pay the lender for its services. The principal is the term for the original loan amount you will pay back. The interest is the cost of borrowing the loan.

You will also probably be paying taxes and insurance each month, along with your loan fees. The property taxes you will pay vary according to the size or value of your home along with the area where it is located. Taxes are calculated as a percentage of the property value. Homeowners’ insurance can be divided into hazard insurance and mortgage insurance. Usually you are not required to have both types of insurance. The hazard insurance protects the homeowner and the lender in case any natural disaster or unforeseen destruction would happen to the home. Mortgage insurance is for the lender to in case you do not pay back your loan. These monies are collected by the lender who then pays them to the government.

This may sound like a lot of payments that will add up month upon month, but remember that as you make your mortgage payments, you are acquiring home equity. Home equity is the amount of your home that you have already paid off, or the amount of your home that you actually own! Not only can you borrow this money later and use it for loans, but you can keep saving and make it grow tremendously over time.