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Understanding Mortgages

If you've ever heard your loan officer mention something called a "pity payment" and scratched your head trying to figure out where the need for "pity" came into the equation, you're not alone. What they were really saying was "PITI," and they were talking about Principal, Interest, Taxes and Insurance, which are the four main components that make up a typical monthly mortgage payment.

While PITI is the typical, and commonly assumed makeup of a mortgage payment, some loan programs could include other elements. Based on your property and loan type, your monthly payment may also include a common/maintenance charge, homeowners' association fee or mortgage insurance. For the most part, though, PITI is what you'll be looking at when planning your mortgage and the monthly payments to come.

 

Let's take a closer look at a typical PITI monthly payment breakdown:

PRINCIPAL: The principal is the amount that pays back and reduces the mortgage loan balance. As time passes, the amount you pay in principal each month will increase as the interest amount decreases.

INTEREST: Interest is the ongoing cost of borrowing the money in a mortgage loan. As time passes, the amount you pay in interest each month will decrease while the principal amount increases.

TAXES: Real estate or property tax amounts are decided through your property assessment. The taxes due for your property will be the same amount regardless of the size of your mortgage. The tax portion of your mortgage payment is typically held in an escrow account that makes sure your taxes are paid on time.

INSURANCE: Homeowners or hazard insurance amounts are decided by the coverage plan you choose with your insurance company. This part of the mortgage payment is not affected by the size of your mortgage. Insurance payments are typically held in an escrow account that makes sure your insurance is paid on time. Some loan programs also have mortgage insurance, which is affected by the size of your mortgage. Mortgage insurance is insurance for the lender, should you default on (stop paying) your debt obligation.


Pieces of a home puzzle

It's good to understand how this all comes together when you're considering how much you can afford and, if hunting for a new home, where you want to search. Imagine this scenario: You have a pre-qualification for a mortgage, the monthly payments are within your budget, and all you have to do is find the perfect home. You find that home, go back to your loan officer, and find that the monthly payments suddenly jumped up past your comfort level. What happened? Is your loan officer playing tricks?

Not at all. If you had been paying attention to property taxes while you were doing your home search you may have noticed that the property taxes on this must-have home were significantly higher than what had been estimated. Loan officers generally make it their business to get those estimations as close to local averages as possible but it can happen that a certain municipality happens to have a higher rate than the others around it. The same can happen with homeowners' insurance. Not all insurance companies have the same prices, and each property and situation will be just a little different. Your loan officer will do their best at estimating during your pre-qualification, but until you have those real numbers it's just a "best guess."

 

Too many details to keep track of? Should you throw your hands in the air and run? Well, ultimately that's up to you, but if you decide to see it through you'll be happy to know that you have allies. Your loan officer should be able to help you with any questions you have and supply you with information that you can read over at your pace. If you're working with a real estate agent and an insurance agent, they should be valuable resources for your questions as well. All of these professionals have made it their business to know this stuff inside and out, and they're there to help you. Bring your questions.

And now, knowing what you do, you can tackle this mortgage planning stuff with full awareness of how each of these pieces fit into your overall monthly payment picture. There's no need for pity here. Just some good old fashioned self-confidence, knowing that you've got this.


Understanding Mortgages

You may have found that everyone seems to have a tidbit of sage wisdom to share when they learn that you're looking for a mortgage, but not all "conventional wisdom" may be up to speed with the times. It's important to have good information. This is a big decision, and not knowing all of your options could greatly impact both your buying power and financing for your new home.

Let's debunk the top 3 most common mortgage misconceptions you may encounter as you consider your options for purchasing and financing a home:

Misconception #1: Credit Ratings

"Poor credit scores stay with you forever."

Actually, credit scores change each month. A late payment in the previous month can seriously affect your score, but if you make all subsequent payments on time, each month your score should improve. There are many factors that affect your credit score, so bring your questions to your loan officer when you're getting ready to finance a home.

Misconception #2: Mortgage Costs

"Lenders get you with 'up-front' fees."

Most reputable lenders will provide you with a free pre-qualification while you're shopping for your home. Typical acceptable up-front fees are the property appraisal and the credit report. It's okay to ask your loan officer about what fees to expect during the process, how much they will be and when they'll be due.

Misconception #3: Housing Affordability

"A 20% down payment is needed to buy a home."

Not at all. There are loan programs that allow 0% to 3.5% down payments. Through loan products backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA-RD), a wide range of possibilities may be available even if you may not have a lot of money saved. Many State Housing Agencies allow borrowers to receive cash assistance for down payments, and even "Conventional" mortgage loans can have low down payment options. If you only have a little saved so far, ask about what options may be available to you.

It can all seem overwhelming but it doesn't have to be. Through the years there have been plenty of changes to the offerings and laws surrounding the mortgage industry so an experience that your friend had years back may not apply to what it's like to get a mortgage today.  If your helpful neighbor or knowledgeable Uncle Fred are insisting on something that doesn't match up with what you've been hearing elsewhere, bring your question to the professionals.


Understanding Mortgages

You hand over your pay stubs, your tax returns, bank statements, photo identification and anything else that's been requested. Images of a frowning person with an enormous "Denied" stamp plague your dreams as you wait for news. Minutes feel like hours, hours like days, days like... okay we get the picture. It can be nerve-racking not knowing what's happening behind the scenes once you've submitted a mortgage application.

In truth, qualifying for a mortgage is a matter of matching up your income and your debts with equations so that your mortgage lender sees that you'll be likely to pay back your loan. The most important factors are usually these:

Housing Ratio

Housing Ratio equals Housing Payment, or principal, interest, taxes and insurance, divided by Gross Monthly IncomeThis is your total monthly housing payment as a percentage of your gross monthly income. Your total housing payment consists of principal, interest, property taxes, hazard insurance, mortgage insurance (if applicable) and any condo, co-op or Home Owners Association fees.

Debt Ratio

Total Debt Ratio equals Housing Payment, or P.I.T.I., plus Recurring Monthly Debt, divided by Gross Monthly IncomeThis is your total monthly housing payment plus recurring monthly debts as a percentage of your gross monthly income. Other debts include all other payments such as cars, credit cards, student loans, personal loans, retirement savings loans, etc.

How High Can They Go?

It varies by loan program and other factors, but the approximate range for your debt ratio is from approximately 33% to 43%.

Example:

If your total gross income is $5,000 per month, your total housing payment plus recurring monthly debt payments should not exceed approximately $1,650 for 33% ratio or $2,150 for a 43% ratio.

What's Right for Me?

The truth is, everyone is different. Some people are comfortable using a higher percentage of their income, and others are not. Family size, other expenses and lifestyle can all have an impact. These are topics you review with your loan officer during pre-qualification, so bring your questions. The goal is to find a payment and purchase price that will be comfortable for you.

For information purposes only and is not a commitment to lend. Programs, rates, terms and conditions are subject to change at any time. Availability dependent upon approved credit and documentation, acceptable appraisal, and market conditions. Not all programs available in all areas. Residential Mortgage Services, Inc. is a Maine Corporation headquartered at 24 Christopher Toppi Drive, South Portland, ME 04106. NMLS #1760; www.nmlsconsumeraccess.org; Visit http://www.rmsmortgage.com/about/state-licensing for list of state licenses. Equal Housing Opportunity.


Understanding Mortgages

Did You Know?

Improving your credit score may save you money on your home financing. That’s because higher FICO® (Fair Isaac Credit Organization) scores typically result in better interest rates. There are also industry and lender level guidelines relative to a borrower’s credit ratings and history that help determine your qualification for certain loan programs, your capacity to repay the loan and your interest rate.

FICO Score BreakdownHow FICO® Credit Scores Work

"FICO® scores" are the credit scores most lenders use to determine your credit risk. You have three FICO® scores, one for each of the three credit bureaus—Experian®, Equifax® and TransUnion®. Each credit score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores will change as well.

  • When you apply for credit, lenders want to know what risk they would take on by lending you money.
  • Your 3 FICO® credit scores affect how much lenders will offer you at a given time.
  • Taking steps to improve your FICO® scores may help you to qualify for better rates from lenders.

FICO Score chart

*APR = Annual Percentage Rate ** Monthly payment does not include taxes or insurance

For information purposes only and is not a commitment to lend. Programs, rates, terms and conditions are subject to change at any time. Availability dependent upon approved credit and documentation, acceptable appraisal, and market conditions. Not all programs available in all areas. Residential Mortgage Services, Inc. is a Maine Corporation headquartered at 24 Christopher Toppi Drive, South Portland, ME 04106. NMLS #1760; www.nmlsconsumeraccess.org; Visit http://www.rmsmortgage.com/about/state-licensing for list of state licenses. Equal Housing Opportunity.


Understanding Mortgages

With rates trending upward after reaching historic lows, refinancing may seem like a terrible idea. Well, that all depends on what you’re trying to accomplish. Even if mortgage rates aren’t at rock bottom, they’re still quite good if you take a look at the double-digits they used to be “back in the day.” And when comparing your borrowing options between credit cards and other types of loans, refinancing may still be the preferred choice.

The specific reasons vary, but generally people refinance to save money. Perhaps it’s by obtaining a lower interest rate or by reducing the repayment term (how many years it will take to pay back) on your home loan. Maybe you’re looking to consolidate debts into a better rate than offered by credit cards. You might refinance to convert an adjustable loan rate to a fixed loan rate.

There are fees involved in a refinance, so you’re going to want to take a look at three elements to make sure that you’re making a good investment decision.

Here is a quick calculation:

                                 Total Cost of the Refinance

                    --------------------------------------------------------------            =           Break Even

                         How Much You’ll Save (monthly)

 

Divide the total cost of the refinance by the amount you would save per month. This will tell you how long you’d need to live in your home in order to "break even."  If you own the house longer than this then each month after that, you’re saving money.

Determining if refinancing is the right choice for you can seem complicated, since there are many factors to consider, but that’s why it’s important to have a trusted resource for your questions. Do the math and reach out to your loan officer. They’ll be happy to help.


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