Mortgages Dissected: Details to Know
Whether you are a first-time homebuyer or looking to refinance, the mechanics of a mortgage are often a mystery. We break down mortgage basics in today’s post so you can feel confident when exploring your financing options.
A mortgage is a legally binding agreement where a bank, credit union, or other creditor lends money for a specified rate of interest in exchange for accepting the title of the debtor’s policy until payment of the debt is made in full, at which time title is conveyed to the debtor.
There are always at least two parties involved when a mortgage is generated.
Lender – This is the financial institution who loans money to buy a home. Lenders underwrite, or review, a borrower’s financial worthiness and determines how much money will be lent and at what interest rate.
Borrower – The individual, individuals, or entity seeking the loan is called a borrower.
Loan Servicer – Once a mortgage is created, the loan servicer is a company responsible for providing monthly statements, accepting payments, and managing escrow accounts.
Before the first monthly mortgage payment is made, there are often costs that are either paid in full up front or included in your mortgage payment.
Down Payment – This is the amount of money the borrower pays up front. Often the larger the down payment, the more favorable terms that can be negotiated.
Closing Costs – These are fees charged by the loan originator. The fees vary widely by the type of mortgage, location, and lender. Closing costs may include origination fees, title insurance, underwriting costs, appraisal fee, survey cots, recording fees, and more.
Discount Points – A lower interest rate can be purchase by buying discount points. This may be beneficial if will likely stay in the same home for five or more years and want a lower monthly payment.
Escrow Account – Owning a home comes with the responsibility of paying insurance and taxes. To make it easy, many mortgages will collect money for both costs and keep them in an escrow account until payment is due.
The amount of your monthly mortgage payment is determined by several factors
Mortgage Term – The shorter your term, the higher your monthly mortgage payment for with the same loan amount and interest rates.
Principal – The amount of each mortgage payment that goes towards reducing your loan balance is called “principal.”
Interest Rate – The interest rate determines how much of your monthly mortgage payment goes directly to your lender.
Private Mortgage Insurance (PMI) – If your down payment is less than 20% of the amount borrowed, your lender will require you to purchase insurance often referred to as PMI.