So you’re thinking about buying a home? Well there are a lot of things to think about when it comes to mortgages. Today we are discussing the mortgage basics you should know to help you make informed home financing decisions. For example, did you know that if you use a mortgage to help you buy a home, you will repay more than the loan amount you borrow? How much you repay is determined by several factors. The first factor is the interest rate which is the percentage of your loan amount a lender charges you to borrow money for buying your home. Interest
rates are based on current market conditions, your credit score, the down payment, and the type of mortgage you choose. Discount points are charges you or the home seller may choose to pay the lender to reduce your interest rates. This is usually done when closing on buying a home. One point is equal to 1% of the principal amount of the mortgage. If you qualify, you may be able to pay 1 or more points to lower your interest rate. A lower interest rate means lower monthly mortgage payments on your home.
Then we have the origination charge, this includes fees charged by the lender, other than discount points for item such as underwriting, loan processing, and other expenses. If you qualify, you may be able to finance the origination charge as part of your mortgage amount. In addition to the origination charge are fees charged by third parties such as a credit report fee, appraisal fee, and county fees. Your loan term is the amount of time you have to pay off your mortgage balance. Shorter loan terms
typically mean higher monthly mortgage payments, but often have lower interest rates so you may pay less in total interest than with a longer mortgage term. Remember that interest rates only tell part of the story. The total cost of mortgage includes the interest rate plus discount points, the origination charge, and third party fee. Many of these fees are included in the annual percentage rate or (APR) which is typically high than the interest rate. The annual percentage rate enables you to compare mortgages of the same dollar amount by considering their total annual cost.
Now about your mortgage payment; a mortgage payment is typically made up of four parts. The first part is the principal which is the amount of money borrowed. The second part is the interest which is the cost of borrowing the money. The third is the taxes which are the property taxes charged by your local government. Typically your mortgage servicer collects a portion of these taxes in every mortgage payment and holds the funds in an escrow account to make tax payment on your behalf as they become due. The last part is the insurance which refers to home owners or hazard insurance that provides protection against property damage due to wind, fire, or other risks. Like taxes, insurance fees are typically collected and paid by your mortgage servicer from an escrow account. Depending upon your property location, property type, and loan amount, you may have to pay other monthly or annual expenses such as mortgage insurance, flood insurance, and homeowner’s association fees. The more you know about mortgages going in, the better you are able to make informed decisions as you go through the process of getting one.