What is 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. IN addition, you will be required to make payments of your homeowners insurance, real estate taxes and association dues to your lender on a monthly basis to be placed in a an escrow account, in addition to other required expenses that may apply. Your lender will then pay those third parties from the escrow account funds.
- The principal part of your payment reduces the original amount you borrowed.
- The interest part covers the free 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.
Use of an escrow account to pay for taxes and insurance is an option, as long as you have at least 20% for down payment. If you choose this option, or you have less than a 20% down payment, your monthly payment to your lender will include property tax and homeowners 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 lender requires you to have a home owner’s 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 will 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 will get a better idea of the e amount soon after you apply for a mortgage, when you receive a good faith estate that details the approximate costs you will pay on or before your loan closing. You may be able to add your closing costs to your loan amount to limit how much out of pocket cash you will need to close.
How you should shop for Mortgage loan
Home loans are available from several types of lenders such as thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.
What other costs should be considered?
- Maintenance: it cost be costly to keep a property in top condition. This is particular thru 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. The 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.
- Association Dues: Condominiums and planned unit developments (PUDs) often have homeowners associations that can charge fees as high as several hundredth dollars a month. These may be included as part of your mortgage payment. If not, you will need to budget for them.
How do I know how much money I can borrow to buy a home?
You need to apply for preapproval that states the maximum loan amount you can borrow. Add your preapproved maximum loan amount to the amount you plan to use for your down payment, and you will know your home purchase price range.
How do lenders determine if a customer qualifies for a mortgage?
Lenders look at your credit score, the cost you have available for a down payment and closing costs, your income, and your existing debt and financial obligations two ration guidelines are used
- The housing expense-to income ratio ( or front-end ratio) compares your anticipated monthly mortgage payment to your total household gross monthly income ( pre-taxed)
- The debt-to-income ratio (or back-end ratio) compares your anticipated monthly mortgage payment to your gross ( pre-taxed) monthly earnings and your monthly debt requirements. Monthly debt includes credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony.
