How to Define Mortgage Debt

Mortgage debt provides entry into the real estate market.

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Mortgage debt interest often totals hundreds of thousands of dollars over the course of a home loan. As such, it is critical for you to be able to define mortgage debt, as it relates directly to your bottom line. Loan security is central to the mortgage debt contract, where your real estate serves as collateral to back the loan. Collateral provisions enable banks to foreclose on your property and auction it off to compensate themselves for missed payments. Learn the payment terms of the mortgage contract, so you may build home equity and avoid foreclosure.

Step 1

Hire a professional to appraise the home of interest during the mortgage loan application process. To protect itself from losses, the bank verifies that the home?s selling price matches its value in reality.

Step 2

Define mortgage loan principal as the amount of money that you are to pay off. In general, your mortgage principal plus your down payment should equal the home?s purchase price.

Step 3

Identify mortgage loan duration, or the time until maturity. Most mortgage contracts call for you to pay off the loan within either 15 or 30 years.

Step 1

Recognize that your full mortgage payment is due on the first of the month. Conditions for payment also include one 15-day grace period. You will be charged a late fee if the bank does not receive your full mortgage payment before the grace period expires. After 30 days of missed payments, your mortgage is now in default, and the bank may initiate the foreclosure process.

Step 2

Divide your monthly mortgage bill into principal, interest and escrow expenses. Principal payments reduce your mortgage balance and increase your equity, or financial ownership of the home. Interest charges compensate the bank for making out your mortgage loan.

Step 3

Monitor your escrow account expenses. Escrow deposits finance property taxes, homeowner's insurance and private mortgage insurance (PMI). Homeowner's insurance covers the house and contents against damage and gives the homeowner liability protection in the event of accidents in the home or on the property. Property taxes provide for local services, such as school buildings and police protection. PMI protects the bank against losses. The insurer pays the bank a cash settlement if you default on your mortgage balance.

Step 4

Categorize home loans as either adjustable-rate mortgages (ARMs) or fixed-rate mortgages. Fixed-rate mortgages carry level interest rates throughout loan maturity. ARMs, however, feature a variable-rate structure that shifts with the prevailing economy. ARM rates may change monthly or annually, in step with a particular index. For example, your monthly ARM rate could add a 5 percent premium to the 12-month London Interbank Offered Rate (LIBOR).

About the Author

Kofi Bofah has been writing Internet content since 2010, with articles appearing on various websites. He is the founder of ONYX INVESTMENTS, which is based out of Chicago. Bofah enjoys writing about business, finance, travel, transportation, sports and entertainment. He holds a Bachelor of Science in Business Management from the University of North Carolina at Chapel Hill.

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