A mortgage
is a loan obtained to purchase real estate. The mortgage
is a lien (a legal claim) on the home or property that
secures the promise to pay the debt. If you do not pay
your mortgage payments, the lender can take your home from
you. By foreclosing on the mortgage, the lender can resell
the home in order to recoup the money loaned to you.
What is
included in a mortgage payment?
Most mortgage payments include: principal, interest, real
estate taxes and homeowners insurance. Lenders often call
this a PITI payment.
·
Principal – The principal is the part of the mortgage
payment that is applied to the original amount borrowed.
·
Interest – The interest is the amount the lender charges
for lending the money.
·
Taxes
– The taxes portion of the payment includes the property
taxes that the lender collects from the borrower and pays
to city and county government for the property.
·
Insurance – A lender will require that you maintain
homeowners insurance on your home in the event of property
loss or damage.
The lender
will deposit the tax and insurance portions of your
payment into an escrow account. An escrow account is a
special account held by the lender and used only for the
payment of taxes and insurance related to a specific
property. When the yearly property tax and insurance bills
are due, the lender simply deducts the correct amount from
your escrow account and pays the bill.
What are the
factors that influence the amount of a mortgage payment?
o
Size
of down payment
o
Amount of mortgage
o
Mortgage interest rate
o
Repayment term
o
Cost
of mortgage insurance
o
Amount of property taxes
o
Amount of annual homeowners insurance premium
What is
amortization?
Over time, you will repay your mortgage gradually through
regular, monthly payments of principal and interest. The
amounts of these payments are calculated to let you own
your home debt-free at the end of a fixed period of time.
During the first few years, most of your payments will be
applied toward the interest you owe. During the final
years of your loan, your payment amounts will be applied
mainly to the remaining principal. This type of repayment
method is called amortization. If you sell your home prior
to the end of the loan, you will be required to pay back
the remaining principal balance due on your mortgage loan
to your lender.
Your REALTOR®,
based upon his or her experience, may offer to help you
obtain a mortgage loan. He or she may also recommend that
you deal with a particular lender, title company, and an
attorney or settlement/closing agent. You are not required
to follow the recommendation. You should compare the costs
and services offered by other providers with those
recommended by the real estate agent.
Types of Loans
Federal Housing
Administration (FHA) - Borrowers qualify under FHA guidelines. In most cases,
both one-time and monthly mortgage insurance premiums are
required regardless of amount of down payment. The minimum
down payment starts as low as 3%. Your total housing
expenses and all of your other obligated debt should not
exceed 41% of your gross monthly income under FHA
programs. The down payment can be from a gift or borrowed
funds secured by collateral. FHA loans are offered to all
and they have lower qualifying standards than conventional
loans.
Veteran's
Administration (VA) - Borrowers who are veterans may qualify under VA guidelines. There is
no mortgage insurance, but here is a one-time funding fee.
The borrower must be a veteran and provide a Certificate
of Eligibility. Qualifying is based on net income, family
size, and a provision for utilities and maintenance. Total
housing expense and all other debt cannot exceed 41% of
gross monthly income. Up to 100% financing is available.
VA loans can only be used for "owner occupied" properties
and you can use it over and over again, as long as each
time the home gets sold and the VA loan is paid off.
Conventional
-
A conventional loan is any loan not insured or guaranteed
by a government agency. For the most part, the standards
for underwriting a conventional mortgage are established
by the national secondary market investors, primarily the
Federal National Mortgage Associations (FNMA) and the
Federal Homes Loan Mortgage Corporation (FHLMC). All
conventional loans over 80% to value will require PMI
(Private Mortgage Insurance). There are many conventional
loan programs.
Fixed-Rate Mortgage
- Using a fixed-rate mortgage, your interest rate stays the
same for the term of the mortgage, usually 30 years. Your
principal and interest payment remains stable, making it
easier to plan a monthly budget.
Adjustable-Rate
Mortgage
- With an
ARM,
your interest rate and monthly payments start out lower
than with a fixed-rate, but your rate and payments can
change either up or down, depending on where interest
rates are that year. |
