What To Consider When Getting A Mortgage
When you shop for a mortgage, your lender or mortgage broker provides you with options. Make sure you understand the options and features. This will help you choose a mortgage that best suits your needs.
This includes your:
- amortization
- payment frequency
You can find information on each of these features in the sections below. For more detailed information on each item, click on the links provided.
How Your Mortgage Choices Can Affect Your Future
Mortgage lenders charge a penalty fee when you break your contract. This means, if you sell your home, you could owe the lender thousands of dollars in penalty fees.
You could also pay penalty fees if you pay off your mortgage early. Unless you plan on owning your home until you pay it in full, you may need flexibility on your mortgage.
Options related to mortgage flexibility include if your mortgage:
- is open or closed
What Are The Components Of A Mortgage Payment
Buying your first home can be an intimidating process. Many buyers make mistakes when purchasing their first home because they dont know enough about the mortgage market or what to expect when applying for a loan and making mortgage payments however, there are many quick and easy ways to prepare for the mortgage process. First and foremost, its important to understand the components of your mortgage payment. Heres what you need to know.
Basically, a mortgage is a loan used to purchase a home. The type of mortgage you select will depend on your financial needs, including the loan term, loan size and down payment that works best for you. Each of these elements will help determine your mortgage payments. Then, each payment will consist of the following:
Mortgage Principal: With each loan, a portion of your money will be used towards repaying the mortgage principal. This refers to the outstanding amount of money owed to the lender. So with each mortgage payment, your mortgage principal will decrease.
Interest: Mortgage interest is the percentage owed in addition to your mortgage principal. This rate is directly related to the perceived risk of the borrower. In other words, if the borrower is a high risk to the lender and may likely default on payment, then this borrower will have a higher interest rate than a borrower that is deemed unlikely to default on payment.
Don’t Miss: What Does A Cosigner Do For A Mortgage
How To Find The Best Mortgage
Its important to understand as you shop for a mortgage that not all mortgage products are created equal, so doing your research is essential, says Kirkland.
Some have more stringent guidelines than others. Some lenders might require a 20 percent down payment, while others require as little as 3 percent of the homes purchase price, Kirkland says.
Identifying the mortgage thats best for your situation involves assessing your financial health, including such factors as your income, credit history and score, employment, and financial goals.
In addition to understanding the various mortgage products, spend some time shopping around with different lenders.
Even if you have a preferred lender in mind, go to two or three lenders or even more and make sure youre fully surveying your options, says Pataky of TIAA Bank. A tenth of a percent on interest rates may not seem like a lot, but it can translate to thousands of dollars over the life of the loan.
to determine the right time to strike on your mortgage with our daily rate trends.
How Much Of A Mortgage Goes To Principal
The amount of mortgage going to principal varies depending on how long you have been paying the loan. While your monthly payment may be the same each month, different portions are designated for different parts of the loan in reality. In most cases, lenders will see that most early payments go towards paying off the loans interest. This is to ensure they get paid upfront. As the loan term carries on and the interest is paid down, more of the monthly payment will go directly to the principal. The reason for this is because of loan amortization, which essentially breaks down your payment schedule. Several amortization calculators online can reveal exactly how much of your payment is going towards the principal. I recommend using this calculator provided by Bankrate.
Read Also: How To Understand Mortgage Payments
What Doespiti Stand For
Most loans are repaid in two parts: principal and interest. This includes repaying the money you borrowed along with interest tothe bank.
But when it comes to a mortgage loan, P& I arent youronly expenses. You also have to pay for homeowners insurance and propertytaxes.
All these homeownership costs are bundled together in onemonthly payment, often referred to as PITI.
The PITI acronym stands for:
- Principal The amount of your mortgage loans principalbalance repaid each month
- Interest The amount of interest your mortgage lendercollects on the loan
- Taxes Property taxes required by your city and county government
- Insurance Homeowners insurance and, if required, private mortgage insurance premiums
If you want to know how much house you can afford, you needto consider your entire PITI payment not just principal and interest.
Budgeting for taxes and insurance as well as P& Iwill get you much closer to the loan amount a lender will actually approve youfor.
Components Of A Mortgage Payment
Homeownership
There is more to your mortgage payment than simply what youre paying back to the bank. Your mortgage payment is made up of several components including your loan money back to the bank, your mortgage interest, and your escrow. Here is a breakdown:
1. Principal the amount that was loaned to you by the mortgage lender2. Interest – the fee you’re paying the bank for lending you the money3. Escrow – monthly allowance for property taxes and homeowners insurance
Your Mortgage PrincipalThe mortgage principal is what you borrow to purchase the house, also known as the loan amount. This is the most straight-forward component of your loan payment.
Your Mortgage InterestThe interest rate is the cost of borrowing money and essentially what the bank is charging in order for them to lend you money. Interest rates fluctuate on a variety of factors including your type of loan, home location, down payment, credit score, and more.
Your EscrowYour escrow is typically the combination of your property tax, homeowners insurance, and potentially private mortgage insurance . Your escrow account is set up to collect your monthly taxes and insurance to pay in a lump sum at the end of the year. The payment is normally completed by your lender making it a seamless process for you as the borrower. At the end of the year, a reconciliation is done and adjustments to your escrow and your mortgage payment may be necessary.
Also Check: What Is Rocket Mortgage Interest Rate
What Are The Lump Sum Mortgage Payment Benefits
Simply put when you pay a lump sum it all goes down on the principal of the mortgage. This is unlike your normal mortgage payment where part of it goes to interest and part of it goes to the principal. The benefits of a lump sum mortgage payment is that it brings down the amount you owe on your mortgage immediately. And it does it by the full amount you put down . Plus it saves you interest for years to come on that lump sum amount.
Meaning that if you paid a lump sum payment of $10,000, you would save yourself the interest on that amount every year going forward, because you no longer owe it on your mortgage.
How Does Apr Work On A Mortgage Loan
Understanding how an APR affects your home loan is an important part of the decision-making process. You may choose one option over another based on the APR a lender offers.
When it comes to the APR of a mortgage loan, there is more involved than just interest. Along with interest, the APR can include processing and underwriting fees, mortgage points and private mortgage insurance. The APR determines the total annual cost of borrowing money from a lender. It’s important to learn as much as you can about your loan before you accept and sign because APR fees can vary from lender to lender
You May Like: Can You Sell House Before Paying Off Mortgage
The Good Part Of Increasing The Amount Of Your Mortgage Payment
When you increase your mortgage payment you are on the hook for that new amount going forward. This can be a great thing if you have enough room in your budget to handle it. Someone with a 200K mortgage and could raise their monthly payment by $200, and pay off their mortgage years early.
Like 6 years and 6 months earlier. Its insane. Plus with a 4.5% interest rate they would save just over $35,000.
Different From Escrow Purchase Account
“Escrow” also refers to funds held in a third-party trust account during a mortgage refinance or real estate purchase transaction. The escrow agent is a neutral party responsible for the collection and disbursement of funds as required. The escrow agent collects the first escrow payment and reserves needed to establish an escrow impound account at closing.
References
Don’t Miss: Which Is Better 30 Or 15 Year Mortgage
What Is A Home Down Payment
A home down payment is simply the part of a homes purchase price you pay upfront and does not come from a mortgage lender via a loan.
Suppose you want to buy a house priced at $100,000. If you put $3,000 toward the purchase price, or 3 percent down, youll take out a mortgage for the remaining $97,000. If you were to put down $20,000, your mortgage would now be for $80,000, and your down payment would equal 20 percent of the purchase price.
Mortgage lenders often refer to the percentage of the purchase price that they finance as a loan-to-value ratio, or LTV. Using the above examples:
- When you put $3,000 down on a $100,000 house, your LTV is 97 percent.
- When you put $20,000 down on a $100,000 house, your LTV is 80 percent.
LTV is important because its how lenders describe the maximum loan they will make.
Generally speaking, a larger down payment can make it easier for you to get approved for a mortgage, and allow you to buy more house for the same monthly payment, or even less. Heres an example:
New Homebuyers Need Help Calculating Your Mortgage Payments
As a new homeowner, with one easy monthly payment, youll cover a number of expenses associated with your new home.
At Maple Tree Funding, we make sure that you completely understand every component of your monthly mortgage payment. Unlike other mortgage lenders, we will review everything with you thoroughly and disclose every cost you should expect ahead of time, so you dont encounter any surprises when it comes to paying for your home.
Wondering how much you can afford to spend on a home? Interested in a New York home and wondering what your monthly mortgage payment would be? We can help you figure it out!
At Maple Tree Funding, we have decades of experience helping first time homebuyers. We know the ins and outs of the mortgage process and can guide you every step of the way as you work to purchase your first home.
Interested in learning more? Give us a call at or contact us online to find out how we can help make the home buying process easier for you.
You May Like: Is Closing Cost Part Of Mortgage
Advantages And Disadvantages Of A Fixed
Varying risks are involved for both borrowers and lenders in fixed-rate mortgage loans. These risks are usually centered around the interest rate environment. When interest rates rise, a fixed-rate mortgage will have lower risk for a borrower and higher risk for a lender.
Borrowers typically seek to lock in lower rates of interest to save money over time. When rates rise, a borrower maintains a lower payment compared to current market conditions. A lending bank, on the other hand, is not earning as much as it could from the prevailing higher interest ratesforegoing profits from issuing fixed-rate mortgages that could be earning higher interest over time in a variable-rate scenario.
In a market with falling interest rates, the opposite is true. Borrowers are paying more on their mortgage than what current market conditions are stipulating. Lenders are making higher profits on their fixed-rate mortgages than they would if they were to issue fixed-rate mortgages in the current environment.
Of course, borrowers can refinance their fixed-rate mortgages at prevailing rates if those rates are lower, but they have to pay significant fees to do so.
Home Down Payment: When Bigger Isnt Better
While making a larger down payment offers many benefits, its not always the right decision. In general:
- Dont deplete your emergency savings to increase your down payment. Youre leaving yourself vulnerable to financial emergencies.
- Its not wise to put savings toward a larger down payment if youre carrying high-interest debt like credit cards. Youll make yourself safer and pay less interest by reducing debt before saving a down payment.
- Putting off buying a home for many years to save a large down payment can be a mistake. While youre saving your down payment, the price of that house is probably going up. While appreciation is not guaranteed, home prices in the U.S. have historically increased each year.
The size of your mortgage down payment is obviously a very personal decision. Tools like Bankrates affordability calculator or down payment calculator can help you determine the right amount for you, and so can a trusted mortgage professional. Ultimately, the decision comes down to your desire, your discipline and your resources.
Recommended Reading: What Banks Look For When Applying For A Mortgage
Working Around The Cash Flow Emergency Issue
We found our way around this issue with a HELOC. That way if we put money down on our mortgage and it turned out we needed to get access to some money quickly. So if something like a car repair or hot water tank going in the middle of the night happens. We had access to those funds. We trusted ourselves to only touch it in emergencies, if that is you the raising your mortgage payment may be the right move.
What Are Mortgage Payments
What is a mortgage payment? Mortgage payments are the payments you make on the long-term loan that enables you to buy your home.
Almost everyone who owns a home has a mortgage and makes mortgage payments. Homeowners typically make these payments monthly, over a fixed period of years. Some standard options include 15-, 20- and 30-year mortgages.
What are the advantages of spreading out mortgage payments across more or fewer years? Each approach comes with pros and cons:
- Shorter mortgages: Shorter mortgages tend to have lower interest rates. They are appealing to some homeowners because they allow the homeowner to pay less interest overall. The tradeoff is that because the schedule becomes more compressed, these mortgages require higher monthly payments. So homeowners must be reasonably confident they can make significant payments each month without falling behind.
- Longer mortgages: Longer mortgages tend to have higher interest rates. So homeowners who choose these mortgages will pay more interest overall. Of course, the appealing tradeoff is that by spreading the payments over a longer term, homeowners can lower their monthly payments to more affordable sums. So extended options such as 30-year mortgages are often attractive to homeowners looking to create more room in their budgets each month.
Recommended Reading: What Is The Most Accurate Mortgage Calculator
Property & School Taxes
As a property owner, youll be responsible for paying property and school taxes. If youd been renting previously, this will likely be new for you.
Luckily, for many first time homebuyers, Escrow makes paying your annual taxes easy! With Escrow, a portion of your monthly mortgage payment is set aside to be used for covering the taxes on your new home. By incorporating tax payments right into your monthly mortgage payment, you wont have to worry about saving to cover your school and property taxes.
What Happens If I Miss A Payment
If you miss a mortgage payment, you could incur late fees and other financial penalties. If you miss multiple payments, you could ultimately default on your home loan and face foreclosure. These consequences can leave lasting impacts on your financial health and jeopardize your living situation.
The best way to avoid missing a payment is first to familiarize yourself with the details of your mortgage. Note that most lenders have a grace period that allows you to submit payments up to two weeks after the initial due date. Further, if you think you will miss a payment, you can reach out to your lender for guidance. They will work with you to find a solution and minimize the financial impact of a late payment.
Read Also: How To Purchase A House That Has A Reverse Mortgage
This Is All About Becoming Mortgage Free Faster
When you decide to pay off your mortgage faster there is usually a question of which is the best way to go about it.
Should you save up for a lump sum payment?
Should you raise your mortgage payment?
Is it best to refinance your mortgage first?
These are all choices that should be given some thought.
Heres what I told them, I think it will be helpful to you too.
First lets just cover some basics on lump sum mortgage payments.
How Will The Apr Affect My Mortgage Payment
Comparing APRs for home loans can help you understand how much you’ll be paying over the life of the loan. When you shop for your mortgage, discuss the following details with your lender to ensure you get the best financing deal for your needs:
- Rates: Request a list of each lender’s current mortgage interest rates. Ask whether they’re fixed or adjustable rates. If they’re adjustable, ask how your loan payment may fluctuate.
- Points: Ask lenders to quote the points in a dollar amount to clarify what you’ll actually be paying. These points are fees paid to the lender for the loan and they help lower the interest rate.
- Fees: Request a breakdown of charges to understand what each fee includes. If you don’t understand certain fees, ask your lender for an explanation.
- Down payments: Some lenders require 20% of the total home purchase price at closing, while other loan types can require as little as 3% down. Check with your lender for details.
- Private mortgage insurance : If you can’t put down the full 20%, lenders may require you to get PMI, which increases your monthly mortgage payment.
Having these costs broken down will help you compare quotes properly and identify who’s offering the best deal. When you choose the right mortgage, you’ll feel secure about your monthly payment and overall budget.
Your lender will provide you with a Loan Estimate which will show loan terms and all of the costs associated with the loan.
Recommended Reading: Can I Get A Mortgage With A 575 Credit Score
