What

What is the difference between a loan and a mortgage?

Simple…a mortgage is a loan that includes taxes and insurance. Because you are buying a home, you will need to pay property taxes as well as keep the home insured. In any home purchase the lender is the one whose asset is at stake because they gave you the loan and the home is used as collateral for that money. Banks require that you escrow money for taxes and insurance 99% of the time. This escrowed money is an addition to your loan payment. Together the loan (principal and interest) plus taxes and insurance make up the mortgage. Basically this is a way for the bank to ensure that the funds to pay for your taxes and insurance are available so they can pay the bill when it comes due.

Additionally, if you don't make a large enough down payment when you buy a home, the bank requires that you pay PMI or Private Mortgage Insurance. Most banks like to see a 20% down payment (80% from the bank & 20% from you…basically they just want you to have significant money in the transaction). However, there are loans available now that allow you to put as little as 3.5% down. The bank takes on more risk by loaning you an additional 16.5% more than a conventional loan. PMI is insurance that the bank takes out on the mortgage that basically says, if you default on your loan and they can't recoup the 16.5%, then the PMI will make up for the loss.