A mortgage is another word for a home loan. Mortgages are designed to help people purchase real estate where there is an existing home or for building a new home. When you take out a mortgage, you’re borrowing money from a financial institution with the promise to repay the loan over time. It’s secure home financing that can help people achieve their homeownership goals and dreams.
Your monthly payment will depend on several factors. Every mortgage payment is made up of four main costs: principal, interest, taxes, and insurance (also known as PITI). Let’s break it down:
Many homeowners choose to have their taxes and insurance paid using an escrow account. This can be a convenient way to pay those bills by taking your estimated tax and insurance costs and rolling them into your monthly mortgage payment. These funds are then taken out of your escrow account and the bills are paid when they’re due by your loan servicing company. All you have to do is make your monthly mortgage payment and your servicer will take care of the rest.
An appraisal is an estimate of a property’s fair market value. Depending on the loan program, an appraisal is required by a mortgage lender before they approve the loan to ensure that the loan amount is not more than the value of the property. The appraisal is performed by an appraiser—typically a state-licensed professional and unbiased third party who is trained to give an expert opinion concerning property value, considering its location, amenities, physical conditions, and more. They walk through the home, surveying the property and looking for issues that may affect the value of the home. During this part of the property valuation, the appraiser also researches the recently sold comparable homes (or comps) in the area to help determine the value. The resulting appraisal report should help you make an educated decision as to whether you should purchase the home.
On a Conventional mortgage, when your down payment is less than 20% of the purchase price of the home, your mortgage lender will require you to get private mortgage insurance (PMI) to protect them in case you default on your mortgage. Some borrowers have to pay up to one year’s worth of PMI premiums at closing, which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment or ask about other loan program options.
The market can be unpredictable. From the day you apply for a mortgage to the day you close, mortgage rates could change. And if they rise, it can increase your payment dramatically. That’s why mortgage lenders offer the ability to “lock in” your interest rate. This guarantees a specific rate for a period of time, usually 30 to 60 days and sometimes for a fee. Locking in your interest rate helps you get a great rate even if the market shifts.
Your annual percentage rate (APR) is the total yearly cost of your mortgage expressed as a percentage. Not to be confused with interest rate. APR gives you a bigger picture of what it costs to finance your loan by accounting for the interest rate and finance charges. This is also why your APR is likely to be higher than the rate stated on your mortgage. What’s great about APR is that, by comparing APRs from different lenders, home buyers can get an idea of the true cost to borrow. And, it prevents lenders from advertising a low rate while hiding fees.
As a renter, you don’t own the place you live in. When you pay rent, you’re paying the owner a fee so you can live there. Essentially, what you pay in rent each month contributes to the mortgage the homeowner or property owner pays.
However, when you pay a mortgage, you’re not paying rent to the homeowner. Since you are the homeowner, your monthly payment goes to your mortgage lender. This cuts out the middleman. Your mortgage lender loans you enough money to purchase the home and, over an agreed upon period of time, you pay back the loan (plus interest, taxes, and other fees). The biggest difference is ownership, and who owns the home you live in determines who pays whom.
A point (also called discount point or basis point) is a percentage of the loan amount. One point equals 1% of the loan. That means one point on a $100,000 loan is equal to $1,000. Points are fees a borrower can pay the lender at closing to buy down the mortgage interest rate.
Yes, if you can afford it and if you plan to stay in your home for a least a few years. Paying points to buy down your interest rate is a viable way to lower your monthly payment and possibly increase the loan amount that you can afford to borrow. However, if you only plan to stay in your home for two years or less, your monthly savings may not be enough to recoup the cost of the points you paid up front. This is a good subject to talk about with your mortgage adviser and your financial advisor before making a decision.
As a general rule of thumb, it’s a good time to refinance when mortgage rates are 2% lower than your current rate. But any reduction can lower your monthly mortgage payments. For example, on a 30-year $200,000 loan with a 5% interest rate, your payment (excluding taxes and insurance) would be about $1,074 per month. But if you refinanced and lowered your rate to 3%, your new monthly payment would be about $843, saving you roughly $231 per month. Check out our refinance calculator to estimate your savings. And you can always talk to a mortgage adviser if you want help calculating savings and weighing your options.