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Mortgages, in theory, part 1 of N
blaisepascal
Here's how a mortgage is supposed to work, in theory:

Harriette (a Homeowner (who's name begins with "H", just like "Homeowner", as a mnemonic to her role in this, and thus an ongoing theme throughout this series) wants to buy a house, but she doesn't have the money to do so. She's got a good, secure, job, a good history of paying her bills, and some savings that she can use as a down-payment, etc, but for a $125K house, she only has $25K on hand.

She goes to Bob, a banker (notice the theme? Good), who is willing to lend her the money to buy the house, secured by a mortgage interest in the house, at 6% for 30 years (I'm doing this example, I have the right to choose numbers which make the math easier). The deal is: Harriet gets $100K as a loan, which she must pay back over 30 years with payments of $599.55/month. She has the right to pay more than that a month, which will shorten the payback period, and she has the right to completely pay off the outstanding balance at any time. On the other hand, if she fails to pay $599.55/month, the bank has a right to take the house, sell it, and use the proceeds to pay off the loan (aka Foreclose).

In an ideal world, where everything is going to plan, there are several ways that this mortgage could be resolved successfully: 30 years, and $215838 in payments later, Harriette could fully pay off the mortgage, on schedule, and own the house free and clear. Or Harriette could decide that instead of paying $600/month, she could pay $300 every 2 weeks and have it payed off in $25 years. Or she could win the lottery, get and inheritance, or otherwise come up with a large lump sum of money and pay off the balance at any time. She could also decide to move and sell the house for more than the remaining balance on the loan is, pay off the loan and pocket the difference. With any of these methods, Harriette ends up without any mortgage obligation and her deal with Bob is concluded.

Harriette could also go to Bob (or Bob's competitor Bill) and point out that interest rates on new mortgages have fallen to 4% over the past 10 years, that she still owes $84K on the house, and thus wants to refinance with a new 20-year mortgage. In this case, after a flurry of paperwork, things basically stay the same, just with some differences in numbers. Harriette needs to pay Bob (or Bill) $509/month for 20 years, and failure to do so could result in foreclosure.

Harriette could also die, and the house (and debt) would go to her heirs.

So, with the exception of the "death" part, that's how things are supposed to work, when everything goes right, in a simple, straight-forward case. What could go wrong? That's the future parts.

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