What makes a mortgage and what is included in your monthly payment?

So many things to learn when buying a home, and believe it or not, some people don’t even know the basics. Basics like, what is a mortgage? Don’t laugh. I had no idea what it was when I first started in this business. I was in your shoes at one time and without the proper guidance, I wouldn’t have known where to begin my home-owning journey.

Let’s begin by defining what  a mortgage is.

A mortgage is a legal contract that grants the lender an interest in a property of the borrower and protects the lender. The recordation of a security instrument (deed of trust) places a lien on the property. The lender holds the title to the property until the debt is paid back in its entirety. If the monthly mortgage payments are not made on time, the lender can sell the property(foreclose) in order to get back its money.

The Down Payment

The down payment is a lump sum paid up front that reduces the amount financed. Borrowers can put as much money down as they want, or as little as 3% (for FHA loans) or no money down (for an 80/20 nonconforming loan – you might want to double check with your loan officer on these programs as many of them have changed ever since the market crisis in 2008). The more money that can be put down as a down payment, the less that has to be financed and the lower the monthly payments will be.

The Mortgage Payment

The mortgage payment is made up of:

Principal – The total money borrowed from the lender. It is the amount being financed.

Interest – The money the lender is charging to make the loan. It is a percentage of the total amount of money borrowed.

Taxes – Refers to property tax. Money to pay the taxes is often put into an escrow account (meaning that the money is placed in the hands of a third party) until it is time to pay or certain conditions are met. When taxes are escrowed, a portion of the property tax is added to the monthly mortgage payment and held in escrow until the property taxes are due.

Insurance – Several types of insurance can come into play with a mortgage. Hazard insurance is required to protect against losses from fire, storms, etc. if the property is in a flood zone, then flood insurance will also be required. If the mortgage being obtained is higher than 80% of the value of the property, private mortgage insurance (PMI) will also be required. This can become pretty expensive, and so many times a second mortgage will be obtained to avoid this fee. For example, if you are seeking a 100% loan program, you can offer your borrower an 80% first mortgage lien and a 20% second lien. Even though the second lien carries a higher interest rate, there is still considerable savings.

These four pieces of the mortgage payment are referred to as PITI.

So there you have it. Your introduction to what a mortgage is. Now that you have a basic idea of load you are about to carry, we can start talking about the process. But not in this article! Be sure to come back and check out more as I become your personal tour guide throughout the mortgage industry.