Wednesday, May 20, 2015

Understanding Mortgages Part 2

One of the most important steps in buying a home is getting financing. Before you even start searching for your dream home, you should talk to a lender and determine what you can afford and learn about what types of loans are available. You’ll also need to understand some mortgage basics.

A mortgage is a loan that is secured by real estate (i.e., the home you purchase). Unless you are paying cash for the home, you'll need a mortgage. You promise to pay the lender back (usually in monthly payments) in exchange for the money used to purchase the home. If you stop paying, you'll go into default, and the lender can take back the property (foreclosure).

Mortgage financing doesn’t have to be confusing. There are a few key things to understand, and the more you know, the more prepared you’ll be.

Your mortgage payment typically includes PITI:
Principal The amount you borrowed ;
Interest The rate or percentage the lender charges you to borrow the money;
Taxes What you pay in annual property taxes to your local city/municipality or county; and
Insurance What you pay to insure your home from damages (fire, natural disasters, etc.). There is also Private Mortgage Insurance (PMI) which is usually required on most loans when your down payment is less than 20%.

Be sure to ask if your mortgage contains a pre-payment penalty. A pre-payment penalty means you can be charged a fee if you pay off your mortgage early (i.e., pay off the loan before a pre-determined date).

Most homebuyers only think about the interest rate, but a lender will use the APR (Annual Percentage Rate) when reviewing and quoting your financing. The interest rate is what the lender charges you to borrow money. The APR includes the interest rate as well as other fees, (closing costs, application fee, origination, etc.) and shows your total annual cost of borrowing. As a result, the APR is higher than the simple interest of the mortgage. That’s why it’s always important when comparing lenders to look at the APRs quoted and not just the interest rate.

Please feel free to call or contact me if you or someone you know needs help obtaining a mortgage loan.

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