| What does my Mortgage Payment consist of? |
Your monthly mortgage payment will be comprised of a number of different elements, which you satisfy with a single monthly payment to your lender. - The largest component will be your mortgage payment (both interest and principal payments) that goes toward the financing and purchase of your home.
- You will also be responsible for real estate taxes assessed as a percentage of your home value.
- Home insurance will usually be required by a lender.
- In addition, if your down payment is less than 20% of the total home value, you will be responsible for making a Private Mortgage Insurance payment.
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| What is a down payment? |
The down payment is the amount of cash that you must provide to your lender at closing as a purchase of your equity in the home. This required amount can range from as low as 3.5% of the home value to over 20% - although you are free to contribute a higher amount if you wish. You will also need to pay closing costs to purchase a house, which will increase the amount of cash you need up front. |
| What is the difference between a Fixed Rate and Adjustable Rate Mortgage (ARM)? |
Mortgages can come in two types: fixed and variable (known as an Adjustable Rate Mortgage, or ARM): - Fixed rate mortgages have a constant interest rate and the monthly repayment amount will remain the same throughout the term of the mortgage
- An ARM is a loan where the interest rate charged on the outstanding amount owed varies as market interest rates change. Most ARM’s are structured to have a fixed payment for a defined period of time, followed by a period where the interest rate can fluctuate within certain boundaries. For example, a 5 year ARM will have a fixed payment for the first 5 years. The amount the mortgage can change is limited by caps defined when you take the loan.
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| What is mortgage insurance? |
Mortgage Insurance is a type of insurance designed to protect the lender in the case of a default on the mortgage. Types of mortgage insurance - FHA Mortgage Insurance: FHA provides insurance on loans provided by pre-approved lenders. The insurance provides the lender with protection in the event the borrower defaults on the loan. Loans must meet certain requirements established by FHA to qualify for insurance. While FHA loans allow borrowers to put down as little as 3.5% the drawback is that you have to pay an upfront insurance premium in addition a monthly premium on top of your mortgage payment. It is important to note, that you could potentially pay FHA mortgage insurance for the life of the mortgage, based on the specifics of your loan.
- Private Mortgage Insurance: If your down payment is less than 20% of the home value and you choose not to get an FHA loan, you will be required to obtain Private Mortgage Insurance (PMI). Similar to FHA insurance, PMI requires the borrower to pay a monthly premium (but no upfront premium) and protects the lender from potential default. With PMI the minimum down payment you can make is 5% of the home value (depending on the size of the loan). You will automatically stop paying PMI when the loan-to-value ratio dips below 78%.
Some borrowers also use ‘piggyback’ loans as a substitute for mortgage insurance. This involves securing two separate loans, the first is a traditional mortgage for 80% of the home value and the second (the ‘piggyback’ loan) for an amount generally around 10% of the home value, meaning the borrower needs to contribute 10% as a down payment. The piggyback loan is subordinate to the first loan and requires a much higher interest rate. Because of the complexity of this loan structure it is not as common as it used to be. |
| What are points? |
Points are a form of pre-paid interest. In exchange for increasing the upfront payment to the lender you can reduce the interest rate on the loan and therefore the monthly payment you will make. As the purchase of points is a form of interest payment the expense is generally tax deductible. |
| What is amortization? |
Amortization is the process by which your monthly principal payments reduce the outstanding amount of your mortgage and increase the equity value. Mortgages amortize over the length of their term to end at $0 when the mortgage is fully paid off. |
| What are the FHA loan limits? |
To receive an FHA loan, your desired loan amount must be less than the specified loan limit in your area. These loan limits are set by the FHA and vary by county; higher cost-of-living areas tend to have higher limits. You can see these loan limits here: https://entp.hud.gov/idapp/html/hicostlook.cfm. |
| What are the VA loan limits? |
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