Mortgage Loan

A home mortgage is a loan given by a financial institution for the purchase of a residence—either a primary residence, a secondary residence, or an investment residence—in contrast to a piece of commercial or industrial property. Depending on the State where the property resides, in a home mortgage, either a mortgage lien is placed on the title of the property OR the owner of the property (the borrower) transfers the title to the lender on the condition that the title will be transferred back to the owner once the final loan payment has been made and other terms of the mortgage have been met or a mortgage lien will be placed on the title.

A mortgage payment is composed of 4 components, simply known as PITI - which is the Principal, Interest, Taxes, and Interest.

  • Principal 

    • The principal of your mortgage is the amount that you owe before any interest is added. For example, if you buy a home worth $250,000 with a 20% down payment, your principal amount would be $200,000. However, throughout the life of the loan, you pay more than your original $200,000 because of interest. Most lenders look at your principal balance and debt-to-income (DTI) ratio when they consider whether they should extend you a loan.  

    • Your debt to income (DTI) ratio is a calculation of your ability to make payments toward money you’ve borrowed. Your DTI ratio is comprised of your total minimum monthly debt divided by your gross monthly income and is expressed as a percentage. A mortgage company will evaluate two ratios:

      • Front Ratio = monthly housing payments/gross monthly income (should be <30%)

      • Back Ratio = total monthly debt obligations/gross monthly income (should be <40%)

  • Interest

    • An interest rate is a percentage that shows how much you’ll pay your lender each month as a fee for borrowing money. Your mortgage lender calculates interest as a percentage of your principal over time. For example, if your principal loan is worth $200,000 and your lender charges you an interest rate of 4%, this means that you pay $8,000 (4% of $200,000) for the first year of your mortgage in interest.

  • Taxes 

    • You must pay taxes on your property. Taxes are one of the often-overlooked costs of homeownership. It’s important to consider them when you think about how much home you can afford. The most expensive tax most homeowners pay is property tax, which may vary by location. Property taxes support the local community and pay for things like libraries, local fire departments, public schools, road and park maintenance and community development projects. It’s difficult to say exactly how much you can expect to pay in taxes because they depend upon your home’s value and your local property tax rate. Taxes can vary from year to year.

    • As a general rule, anticipate paying $1 for every $1,000 of your home’s value every month in property taxes. For example, if your home is worth $250,000, you pay around $250 per month in property taxes or about $3,000 per year.

  • Insurance

    • Home Owners Insurance

      • Though homeowners insurance is not required by law in most states, most mortgage lenders require that you maintain at least a certain level of property insurance as a condition of your loan. Homeowners insurance covers your property if a fire, lightning storm or break-in occurs.

      • Some homeowners insurance policies include additional coverage for damage from flooding and earthquakes as add-ons. If you have something very valuable in your home, like a piece of artwork, an expensive piece of jewelry or a musical instrument, you may purchase a high-value layer of protection called a rider in addition to your standard policy. If you live in a condominium, you’ll usually pay a homeowners association fee in lieu of individual insurance that covers your dwelling.

      • Like property insurance, it’s difficult to say exactly how much you can expect to pay in property insurance because every insurance company uses their own unique formula when they calculate your rates. Some factors that influence your premium include:

        • Your home’s value

        • Whether you live in a rural area or an urban area

        • How close you live to a fire department or police station

        • Whether you have an attractive nuisance on your property, which is something that is likely to injure children who enter your property like a pool, trampoline or aggressive dog

        • How many claims you make each year on average for other types of insurance

      • As a general rule, expect to pay about $3.50 for every $1,000 of your home’s value in homeowner’s insurance per year. In this example, you will pay $875 on a property worth $250,000 per year, or about $73 per month.

    • Private Mortgage Insurance​

      • PMI — private mortgage insurance — is a type of insurance policy that protects mortgage lenders in case borrowers default on their loans. Here’s how it  works:

        • If a borrower defaults on their home loan, it’s assumed the lender will lose about 20 percent of the home’s sales price.

        • 20 percent — sound familiar?

        • That’s the smallest down payment you can make without having to pay mortgage insurance. If you put down 20 percent, that makes up for the lender’s potential loss if your loan defaults.

        • But if you put down less than 20 percent, the lender will usually require mortgage insurance.

        • Mortgage insurance covers that extra loss margin for the lender. If you ever default on your loan, it’s the lender that will receive a mortgage insurance check to cover its losses.

      • How much is mortgage insurance?​

        • Mortgage insurance costs vary by loan program. But in general, mortgage insurance is about 0.5-1.5% of the loan amount per year. So for a $250,000 loan, mortgage insurance would cost around $1,250-$3,750 annually — or $100-315 per month.​​

Mortgage Products Terms

Mortgages are provided by mortgage companies. Most mortgage companies are able to help you facilitate the application for a Conventional Loan, FHA Loan, USDA Loan, or a VA Loan. Each of these types of loans also come in a variety of terms. Below are some examples of what you product terms you may encounter:

  • Long-Term Fixed Mortgages (30-year)

    • This is a mortgage loan where you will make monthly payments for 30 years. It is called a "fixed" mortgage because the interest rates are "fixed" meaning they remain the same for the duration of the loan. If you were quoted for a 4% interest rate, you will pay the same annual interest rate for 30 years. ​

    • The benefit of choosing a 30-year fixed mortgage compared to a short-term fixed mortgage is having lower monthly mortgage payments. The downside is that you will pay a much greater amount of interest over time.

    • The benefit of choosing a fixed mortgage over an adjustable rate mortgage is being able to know your interests will not change over time. Adjustable Rate Mortgages interest change depending on the market rate which means your monthly loan payments may change over time.

  • Short-Term Fixed Mortgages (15-year)

    • This is a mortgage loan where you will make monthly payments for 15 years. It is called a "fixed" mortgage because the interest rates are "fixed" meaning they remain the same for the duration of the loan. If you were quoted for a 4% interest rate, you will pay the same annual interest rate for 15 years.​

    • Short-Term fixed mortgages come with higher monthly payments compared to long-term fixed mortgages because you will be paying off the principal at a higher rate. The benefit over long-term fixed mortgages is that you pay less interest overall on the loan.

  • Adjustable Rate Mortgages (ARM)

    • An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After this initial period of time, the interest rate resets periodically, at yearly or even monthly intervals. ARMs are also called variable-rate mortgages or floating mortgages. ​

    • With adjustable-rate mortgage caps, there are limits set on how much the interest rates and/or payments can rise per year or over the lifetime of the loan.

    • An ARM can be a smart financial choice for home buyers that are planning to pay off the loan in full within a specific amount of time or those who will not be financially hurt when the rate adjusts.

  • Home Equity Line of Credit (HELOC)

    • ​With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing. At the end of the draw period, the repayment period (typically 20 years) begins.

    • To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage.

    • Similar to mortgage loans, HELOCs can come with variable interest rate or fixed interest rate options. 

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