Probably one of the reasons that buying
a home is such an emotional experience is because of the fact that not only do
you have the actual house buying to deal with, but for most home buyers you also
have the mortgage process to encounter. This can be a smooth and almost uneventful
process, or an unnerving one. A great deal depends on the preparation of the buyer
as well as the selection of an efficient mortgage company.
What a Mortgage
Payment Consists of:
1) Principal: The repayment of the original
amount borrowed on a monthly basis.
2) Interest: The cost of borrowing
the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate
taxes paid to a local government agency.
4) Insurance: Homeowners insurance
on the home. Also any mortgage insurance, which is paid to protect the mortgage
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance)
Types of Mortgages
Fixed: A fixed term (for
example, 15 or 30 years) as well as a fixed interest rate. The interest rate and
term are fixed at the start of the mortgage. The monthly amount for the payment
of principal and interest will not change during the term of the mortgage.
Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate
on your mortgage will be adjusted up or down according to current interest rate
levels. The monthly amount for your principal and interest payment will go up
or down with these rate changes.
See more discussion on this subject on the
Choosing a Mortgage page.
How much down payment?
One of the
first questions that home buyers ask is "how much down payment are we going
to need?" Unfortunately, there is no standard answer. Down payments will
vary from 0% (with a VA--Veteran's Administration loan) to upwards of 25% (with
certain "non-conforming" loans). As an average, most home buyers make
down payments in the 5%-15% range, although your own personal situation may dictate
more or less down payment. When you are factoring money for a downpayment, don't
forget about closing costs, which will total in the 2-5% range, payable in cash
at the time of closing.
What is Prequalification? Does it mean that the
loan is approved?
Prequalification is the
initial step in securing a mortgage. A lender will analyze your current income,
debt and basic credit history situation in order to qualify you for a maximum
loan amount. This gives you a clear picture of your financial parameters and a
maximum housing price (the mortgage amount plus your down payment). With preapproval,
the lender verifies your income, debt and financial picture, approving the loan
subject to a favorable appraisal of the property you select. See the discussion
on mortgage prequalification and prepapproval for more information.