Understanding Your Mortgage Payment

Understanding Your Mortgage Payment


Your monthly mortgage payment is typically made up of four components: principal, interest, taxes, and insurance together known as PITI. The principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. The interest is the fee charged for borrowing money.Taxes refer to property taxes your community (town or city) charges which are generally based on a percentage of the value of your home. The lender collects 1/12th of the yearly property tax bill each month. The lender collects taxes in advance and places the money in an escrow fund.Lenders won’t let you close on your home loan if you don’t have hazard insurance to cover your home and your personal property against losses from fire theft, bad weather, and other causes. The insurance amount is collected and paid much like the taxes. Each month 1/12th of the insurance bill is collected and stored in an escrow account until the bill is due. Even if you pay cash for your home it is a good idea to buy hazard insurance in the event your home is damaged or destroyed.

Principal and interest comprise the bulk of your monthly payments. A process called amortization reduces your debt over a fixed period of time. With amortization, your initial monthly payments largely interest and as the loan matures a greater portion of your payment is allocated toward the principal.

Credit 101


Today, to get approved for a mortgage and qualify for the best rates, good credit is more important than ever. When you apply for a mortgage to purchase or refinance a home, lenders need to determine your creditworthiness. They look at your credit score, most often the FICO Score, along with factors like your debt-to-income ratio, employment and credit history.Your credit score helps us decide on the size and cost of a loan and predicts, based partly on your past behavior, how likely you are to repay the mortgage. Lenders use this score to help determine what type of mortgage you’re eligible for, whether to approve your loan and your interest rate.

Here are some ways to raise your credit score, but be patient – it may take a month or two before you see the increase.


Correct your credit history


Reviewing your credit report and correcting any mistakes raises your score, which is based on your credit history.


Reduce the amount you owe on credit cards


Pay down all card balances, so the amount you owe at least or below 50% of the card’s credit limit. This is called your “utilization ratio.” If your limit is $2,000, for instance, you want to owe no more than $1,000 (the lower the ratio the better). If you can’t pay down a balance, try moving it. One card may be maxed out, but if others have small balances, move some of the big balance to the other cards, so all three have less than a 50% utilization ratio. Also, try raising a card’s limit – call the bank and ask. A $950 balance on a card with a $1,000 limit is a 95% utilization ratio. Get the limit up to $2,000 and that utilization ratio goes below 50%.


Start using a card you haven’t touched for a while


This sends a report to the credit bureaus, increasing your available credit and helping the utilization ratio. And since the length of your credit history contributes to 15% of your score, using an old card might help there too. 


Pay all bills on time


This one is a no-brainer!  Just one 30-day late payment can lower your credit score 20 to 40 points. Make sure you always pay on time, even if you’re only paying the minimum.


Focus on revolving accounts versus installment accounts


Revolving accounts, such as credit cards, let you carry a balance and pay a monthly minimum amount. Installment accounts require you to pay a fixed amount each month, like an auto loan. If you have money available, use it to pay down your credit card balances, not to pay off your auto loan sooner. This is because your credit score is heavily weighted to revolving accounts.


Don’t open a new account


This can be good and bad.  Sometimes you need to open accounts because you have an insufficient credit history, just remember that this lowers your score temporarily and makes a new creditor, like a mortgage lender, less eager to open another account for you.


DON’T close any accounts


This is even more important than above.  Remember credit is based in part on your history and current ability to repay your debt.  The less you have to report the less chance you have of showing your ability to repay.  Closing credit accounts, therefore, lowers the amount of credit available to you and therefore lowers your Credit Score.  Too many accounts can also have a negative effect on your credit, so there is such a thing as “too much credit”.  A good rule of thumb is to try not to exceed more than 5-7 open credit cards.

Understanding the mathematical algorithm is difficult even for the most seasoned Mortgage Loan Originator.  If you have questions and or concerns about your credit it is best that you sit with one of our Mortgage Loan Consultants for a more tailored approach to your specific situation.  


Appraisal Basics


An appraisal is an estimate of a home’s value provided by a qualified professional appraiser. The appraisal is critical in determining how much of a mortgage a lender will approve for the home you wish to buy or finance.

If the appraisal falls short of the purchase price you’ve agreed to, you could be refused a mortgage or offered a smaller loan amount than what you applied for. To make up the difference, you will have to come up with a bigger down payment or renegotiate a lower price with the seller.

To help avoid this, ask your realtor for “comparables” also known as “comps” (also called a Comparative Market Analysis or CMA) before you agree on the final purchase price. This allows you to see if you’re paying a fair price and it is part of the information the appraiser uses to come up with the appraised value.

Although it may seem difficult to appraiser properties given their wide range of values, an appraiser is trained to do just that.  He/she will first take note of the property by performing a site visit.  He/she will then comb the area for comparable recently sold properties that are most similar, closest to in proximity, and most recently in terms of sales.  He/she will then use standard adjustments to account for any slight differences between the subject property and the comparable sales.  He/she finally comes up with an opinion of what the fair market value of the subject property is based on the research and evidence from the market.

Federal law entitles you to a copy of the appraisal. If it comes in low, be sure to get your copy. You can ask the lender to do a new appraisal if you can show that the appraiser missed a significant feature of the home or did not consider a recent comparable sale at a higher price.

Remember, an appraisal is NOT the same thing as a home inspection. Although an appraiser will look at the condition of a home and may note major problems, this does not take the place of a home inspection. You should always have a professional home inspector make a comprehensive inspection before you finalize your home purchase.