Understanding A Mortgage Loan

A mortgage loan is a loan that a bank or lender gives you to help finance the purchase of a house. It is most advantageous to borrow approximately 80% of the value of the house or less. The house you buy acts as collateral in exchange for the money you are borrowing to finance the mortgage for a house. A mortgage payment is composed of four parts: principal, interest, taxes and insurance. It is normally paid on a monthly basic.

Principal

Principal is the total amount of money you borrowed to buy the home (e.g., If you have a $200,000 mortgage loan, the beginning principal balance is $200,000).

Interest

Interest is the price that you pay to borrow money from your lender.

Taxes

Taxes are the property taxes you pay as a homeowner. They are typically calculated based upon the value of your house.

Insurance

Insurance includes homeowners insurance and could include mortgage insurance (MI). You are required to get homeowners insurance by your lender to cover your house and possibly the property inside. If your down payment is less than 20%, you will have to pay mortgage insurance which protects the lender if you default on your mortgage loan.

Mortgage Note

When you get a mortgage you will sign legal documents known as a mortgage note that promise you will repay the balance of your mortgage, with interest and other possible costs over a set period of time.

If you default on your mortgage payments, the lender is allowed to take back your house and sell it. This legal process is known as a foreclosure.

DOWN PAYMENT –  This is the amount of money you will put towards a down payment on the house. Make sure you still have cash left over after the down payment to cover unexpected repairs or financial emergencies.

INTEREST RATE -This is the interest rate for the loan you will receive. It is pre-filled with the current 30-yr fixed average rate on Mortgages.

INCOME TAXES -This is an annual tax that governments place on individuals’ income. It includes federal tax, most states and some local entities. The national average is around 30% but can vary based on income, location, etc.

PROPERTY TAXES – The mortgage payment calculator includes estimated property taxes. The value represents an annual tax on homeowners’ property and the tax amount is based on the home’s value.

HOMEOWNERS INSURANCE – Commonly known as hazard insurance, most lenders require insurance to provide damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. All homeowner’s insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property.

MORTGAGE INSURANCE (PMI) – Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price. It protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Also known as PMI (Private Mortgage Insurance).

HOA DUES – Typically, owners of condos or townhomes are required to pay homeowners association dues (known as HOA fees), to cover common amenities or services within the property such as garbage collection, landscaping, snow removal, pool maintenance, and hazard insurance.

LOAN TERM– This is the length of time you choose to pay off your loan (e.g., 30 years, 20 years, 15 years, etc.)

MORTGAGE CALCULATOR – From Rent vs. Buy to Balance over Time, use these dynamic Mortgage Calculators to help you determine the best course of action when considering a home loan.