In Los Angeles, many individuals are often confused with real estate terms such as “Note, “mortgage”, “Deed of Trust”, “principal and interest” and “escrow.” We though it would be useful if we summarize what each of these terms mean, in simplified form, without getting into technical words. Often, our Los Angeles attorneys at Katz Law encounter issues involving real estate law and real estate finance in California. We think it is important for one to know the meaning of common terms before understanding the issues that they may be facing.
What is a Note?
Without any consideration to real estate or real estate law, the word Note means “a brief record of facts, topics, or thoughts, written down as an aid to memory.” However, in the real estate, the word “Note” or “Promissory Note” means a written contract where a borrower (person who lends money from the bank (or another creditor)) agrees to repay the lender at terms that the parties agree on. For example, if the bank is lending you $100,000.00 at 5 percent interest, the Note will specify that, and will also indicate what happens if you do not make your payments (as well as other terms). It is important to read all of the terms of the Note so that you know what you are in for when borrowing money.
What is a Mortgage or a Deed of Trust?
A Mortgage or a Deed of Trust is the security instrument that secures the Note. What does that mean? it is the piece of paper that allows the bank to put a lien on a property. This is also the instrument that allows a lender to foreclose on a property because of its lien if there is a default on payments.
People in California often use the word “mortgage” when the documents they are describing are a “deed of trust” or a “note. The big differences between a mortgage and a deed of trust are the parties involved, and the manner in which a lender can foreclose in case of a default.
The Mortgage Payment – Principal and Interest Component and the Escrow Component
The monthly mortgage payment that a borrower in Los Angeles has to pay normally includes several components: a principal component, an interest component and an escrow component. We will explain each of those component.
The principal component of the payment is the amount that you pay each month toward the original amount that you borrowed from the bank. So, in the example above, that would mean that portion of the payment that will go to pay the $100,000 originally borrowed.
The interest component of the payment is the amount that you pay each month toward the interest on the original amount that you borrowed. In other words, this is the portion of the payment that goes to pay the bank its fees to letting you borrow money.
The escrow component of the monthly mortgage payment is the portion of the payment that is used to pay for the property taxes and property insurance on your home. While you have the option to pay property taxes and insurance directly, many people choose to have the bank pay those through an “escrow account” (and then charge you monthly for it). Additionally, borrowers are entitled to receive yearly reports (or “Escrow Analysis Disclosure Statements” that advise how much money the bank is paying for the property taxes and insurance, and how much will the escrow component of the payment be.
While a loan in Los Angeles may be a “fixed interest” loan, and thus the principal and interest component remains the same, the escrow component of the payment often charges yearly.
Consult With A Qualified Los Angeles Attorney Now!
If you are an owner of a property and need assistance with a real estate matter, contact our qualified attorneys at Katz Law now! We are California attorneys located in Los Angeles who have experience dealing with mortgage-related issues.