Course 1: The Home Buying Process
Course 2: Things Every Home Buyer Should Know
Step 1: Mortgage Approval Factors
Understanding Mortgage Payments
The acronym PITI is commonly used to remember the items – principal, interest, taxes, and insurance. All mortgages do not automatically include all of these. It can vary based on your specific loan.
Details Of Recurring Home Loan Payments
Paying Down Principal
Principal represents the balance of the mortgage. For a typical loan, part of the monthly payment is put towards lowering the balance, although there are exceptions to this such as interest only loans. In the first few years of paying a loan, a smaller portion of the payment will go towards principal, but this increases over time.
Mortgage Interest
Interest is the amount billed by mortgage lenders for use of their money. The interest rate is generally a yearly rate but assessed in monthly increments according to the balance of the loan. Depending on your type of loan, the interest rate can remain the same for the entire life of the mortgage or it may change at certain intervals.
Property Taxes
Taxes are levied based on the assessed value of a property. The amounts are quoted annually but typically due quarterly or twice a year. Overdue taxes can become a lien and take priority over mortgage liens. Many lenders will, therefore, have the home buyer set aside money into an escrow account to ensure that the bills are paid. Those funds are collected monthly by the lender as part of the regular mortgage payment. The lender then pays the taxes directly rather than waiting for the homeowner to do so. It is a method of protecting their investment.
Insurance
There are two types of insurance for a property. Hazard insurance is required while mortgage insurance depends on the specific loan. Both may be part of recurring mortgage payments.
Hazard insurance protects against damages. Lender require this insurance since the home is collateral on the mortgage, and it also protects you against financial loss. Policy premiums are payable yearly and many will want monthly contributions into escrow (similar to tax escrow). They will then submit payments to the insurance company directly to make sure the policy remains active.
Private Mortgage insurance (PMI) is common on mortgages with low down payments (less than 20% down). Otherwise, you would probably not qualify for financing. PMI protects the lender should a homeowner fail to make payments. Lenders estimate that they will not recover the full balance owed to them if the property forecloses, so the mortgage insurance covers some of their loss.
Recurring Home Loan Payments
Not all financing is structured the same and therefore not all home loan payments will include all of the items above. There can also be other monthly charges such as condo fees, which are not collected by mortgage lenders but are an important consideration in calculating total monthly housing expenses. Remember that exact figures are determined by a specific property and interest rate, so any preliminary figures will likely fluctuate.To receive an estimate on what may be part of your loan payments, contact First World Mortgage by calling 860-236-LOAN.