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A Quick and Easy Guide to Home Mortgages
How Do Mortgages Work?
Because most people do not have enough cash for the full purchase price of a home, they obtain a home loan (mortgage) to help pay for it. These loans are based on a few borrowing principles.
The Purchase Price
The price of the home agreed upon by the seller and buyer.
Down Payment
The cash amount you pay toward the purchase price of your home at closing. Your home loan (mortgage) is the amount of money you borrow. Together, the down payment plus the loan make up the purchase price of the home you are buying.
Interest Rate
The basic cost of borrowing money expressed as an annualized percentage.
Annual Percentage Rate (APR)
The annual percentage rate is the cost of the credit expressed as a yearly rate. Because all lenders follow the same rules to calculate the APR, it is a good way for you to compare the overall costs among your loan options. The finance charges for your loan will include any points and fees assessed, and will be reflected in the APR for your loan. The APR is intended to disclose the real cost of borrowing by adding all charges that would not be part of the transaction if you paid cash for your home.
Term of the Loan
The length of time you have to repay your loan, typically, 15, 25 or 30 years.
The Maturity Date
The date the loan is scheduled to be paid in full.
Points
A point is equal to one percent of the amount of money you borrow. Points are often charged at the beginning of the loan and are part of the cost of borrowing money. The loan origination fee is one form of points.
PITI
PITI is shorthand for four amounts that may be included in your monthly mortgage payment:
- Principal
- Interest
- Taxes: Real estate taxes assessed by different government agencies to pay for school construction, fire department service, etc.
- Insurance: Property insurance coverage against theft, fire, hurricanes or other disasters
Impounds
Many borrowers choose to include monthly installments for their anticipated property taxes and homeowner's insurance with their monthly mortgage payment. Impounds represent a portion of a borrower's monthly payments held by the lender to pay for taxes, insurance, and other items as they become due.
Lock-In
A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you for a specified period of time, while your loan application is processed. Lock-in rates can be 30, 45, 60 days or longer.
Second Mortgage
Any loan on the home made after the original mortgage loan or loan which is in a junior position to the first mortgage loan can be referred to as a second mortgage. Lenders will lend money secured by the equity in your home for making home improvements, consolidating debts, sending your child to college, etc.
Equity
Your home's current market value less the amount that you owe on your first mortgage and any second mortgage or line of credit using the home as collateral.
Closing
Closing procedures transfer ownership from the seller to you. Closing costs include fees you pay for the services of the lender and other costs involved with the sale of the home.
Escrow
Escrow is the practice of delivering all required money and documents to a neutral third party to hold until you, the seller, and the lender have fulfilled all the conditions of the agreements. The escrow agent prepares documents, pays off existing loans, requests title insurance, and divides tax and insurance payments between you and the seller. (In some states, this is handled by an attorney.)
Pre-Payment Penalties
Some mortgage lenders charge pre-payment fees if you pay off your mortgage prior to a specified date. Accepting a pre-payment penalty on your loan can sometimes enable you to obtain a lower interest rate. If you do not plan to pre-pay your loan within the period covered by the pre-payment penalty, this feature may save you some finance charges. However, you should check with your lender on pre-payment penalties. You may want to avoid pre-payment clauses if you plan to pay down your mortgage early.
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