When it comes to debts, a mortgage is probably the largest you’ll ever take on. It is a loan used to finance the purchase of your home.
In a mortgage, your home is the collateral for the loan. You will have to sign a legal contract making a pledge that you’ll pay the debt along with its interest and other costs for a typical period of 15 to 30 years. If ever you can’t pay the debt, the lender has the authority to take back the home and sell it to cover the remaining debt. Usually, the terms in repaying the debt will require you to make monthly instalments or payments that may include principal, interest, taxes and insurance or commonly known as the PITI.
Chris Landry, What exactly is PITI when speaking about mortgages? Here they are in detail:
Principal: This is the total money you borrowed to purchase your home. Before the principal will be financed, a sum of cash called a down payment can be given to the lender so that the money which will be used to finance the home will be reduced and then making your monthly payment a bit less.
Interest: It is usually expressed as a percentage. This is what the lender will charge you to use the money that you borrowed. Apart from this, the lender could also charge you with points and additional loan costs. Each point costs one percent of the financed money and is financed together with the principal.
Your principal and interest takes up most of your monthly payments. This process is called amortization and it usually reduces your debt for a fixed period. With amortization, you monthly payments during the early years are mostly interest and then principal later on.
When you pay for your mortgage, it may include money to be deposited in an escrow or trust account to pay some insurance and taxes.
So if you pay less than 20 percent for your down payment, the lender might consider the loan to be a risky move. To remove such risks, the lender will set up your trust account to gather those additional expenses and then they are rolled into your monthly mortgage payment.
Taxes: The taxes are based on a percentage of the total value of your home. Taxes are usually used to finance projects of your community. You continue to pay for your property tax even after the mortgage has been paid off.
Insurance: Most lenders won’t seal the deal regarding your home purchase if you won’t have insurance for it. Your home insurance is very important because it can cover your property against losses such as theft, bad weather, fire, etc. This can be very good if in case such damages will happen to your home. You will only pay for a lesser amount or even nothing at all if your home has insurance.
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