What is a mortgage?
A mortgage is a loan secured by real estate. You borrow money to buy a home and promise to pay it back over a specified period, for a specified cost. Repayment typically happens through monthly mortgage payments. If you stop repaying the loan, your lender may take ownership of the property.
What does my mortgage payment include?
A mortgage payment consists of principal and interest. If you make less than a 20% down payment, your mortgage payment will include principal, interest and mortgage insurance if applicable. In addition, you will be required to make payments of your homeowners insurance, property taxes and association dues to your lender on a monthly basis to be placed in an escrow account, along with any other required expenses that may apply. Your lender will then pay those third parties from the escrow
- The principal part of your payment reduces the original amount you borrowed.
- The interest part covers the fee to borrow the amount you still owe.
- The taxes and homeowners insurance parts are collected and held in an escrow account to pay your property tax and homeowners insurance on your behalf as they come due. If mortgage insurance is applicable to your loan, that part of your payment is forwarded to the agency that is providing the insurance.
What does “amortize” mean?
Amortize means the process of paying off a debt by regularly scheduled payments that include both principal and interest. In the early stages of your mortgage term, your mortgage payment is mostly interest and only a small portion pays down your principal. As you continue making payments through the years, and because the principal balance is reduced, a smaller portion of each payment is interest and a larger portion of your payment goes toward reducing principal until your entire loan is repaid.
What is homeowners insurance?
Homeowners insurance provides financial protection in the event of losses that are the result of fire, wind, natural disasters or other hazards. Most mortgage lenders require you to have a homeowners insurance policy.
What is mortgage insurance?
Mortgage insurance (MI) protects the lender against financial loss if a customer fails to repay the loan. It is usually required when your down payment is less than 20% of the home’s purchase price.
- FHA-insured loans require a mortgage insurance premium (MIP)
- VA loans require a funding fee
- Conventional loans can be insured with private mortgage insurance (PMI)
What are closing costs?
In addition to the sales price of the home, you’ll need to pay for the services of various real estate and lending related professionals who are required to complete a purchase transaction. Depending on your lender, the mortgage you chose, and the location of the home, these “closing costs” can add up to several thousands of dollars. You’ll get a better idea of the amount soon after you apply.
What other costs should be considered?
While homeowners don’t have to pay rent, they do have to manage expenses — beyond mortgage payments — that renters never face.
- Maintenance: It can be costly to keep a property in top condition. This is particularly true of older homes, where system and appliance warranties may have expired. Home warranty plans provide repair or replacement coverage for certain built-in appliances and major home systems for a specific length of time. They cost a few hundred dollars a year, depending on the size of your mortgage and where you live.
- Taxes: Most communities finance schools and other services through property taxes. Tax rates vary from town to town, so ask your real estate agent about taxes in your area. The good news is: whether you pay them directly, or through the tax portion of your mortgage payment, property taxes are usually fully deductible at income tax time. Consult your tax advisor for details.
- Association dues: Condominiums and planned unit developments (PUDs) often have homeowners associations that can charge fees as high as several hundred dollars a month. These may be included as part of your mortgage payment. If not, you’ll need to budget for them.
Have more questions? Call me today! I would love to help you understand your options and clearly explain how different loan programs work so you can make informed decisions!