The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes homeowner’s insurance, and mortgage insurance, if applicable.
If you are refinancing compare what is and isn’t included in your financing options. Watch this video and it’ll make sense.
Mortgages:
What Factors Affect Mortgage Payments?
Well, as this story shows, the amount of the down payment the size of the mortgage loan, the interest rate the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
In bullets:
- down payment
- loan size
- interest rate – fixed or adjustable
- repayment term – how long
- payment schedule – how often
all affect the size of your payment.
How Does The Interest Rate Factor In Securing A Mortgage Loan?
As you’ll see in the video, a lower interest rate allows you to borrow more money than a high rate with the some monthly payment.
Interest rates can fluctuate as you shop for a loan so ask lenders if they offer a rate “lock-in” which guarantees a specific interest rate for a certain period of time.
Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the mortgage interest rate because it also includes the cost of points, mortgage insurance and other fees included in the loan.
What Is A Mortgage?
The original phrase “mort gage” translates as “death pledge”! But as this video explains, a mortgage is a loan obtained to purchase real estate.
The “mortgage” itself is a lien – a legal claim on the home or property that secures the promise to pay the debt.
All mortgages have two features in common: principal and interest.
The principal is the amount you are borrowing which is “secured” by the lender’s claim on the property.
The interest, usually stated as the percentage rate is the additional amount paid for borrowing. Mortgage interest is ‘compounded’ – interest on interest, over time.
What Is Loan To Value (LTV) And How Does It Affect The Size Of My Loan?
While this video simplifies things to help you remember, the loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing.
Each loan has a specific LTV limit. For example: With a 75% LTV loan on a home priced at $100,000 you could borrow up to $75,000 (75% of $100,000) and would have to pay $25000 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds.
So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policies.
Are There Special Mortgages For First-Time Homebuyers?
Yes. Like the video shows, lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past.
Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or who have experienced income irregularities.
What Is PMI?
This video tells you about it all. PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers.
These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility.
PMI’s usually have stricter qualifying ratios and larger down payment requirements than the FHA but their premiums are often lower and they insure loans that exceed the FHA limit.
What Is Mortgage Insurance?
Like the video shows, mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency.
If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.
You generally need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs.