Most people are usually not ready when they apply for a mortgage loan. Of course they know that they require a down payment to buy a house but there are other costs as well as down payments. In this article, I will be talking about the first payments you will make to get a mortgage loan, as well as the monthly installment you make and what they are composed of.
The first payment you will make when making an offer to buy a house is “earnest money”. This is to let the lender know that you are serious about your offer and willing to buy the house. This money is put into an escrow account until your offer has been accepted. If it has been accepted, it will then be put towards your down payment and closing costs. If not, the money will be returned. There is no fixed amount to deposit for earnest money to buy a house. Some states have a minimum requirement, but they usually fall between 1 to 3 percent of your offer. If you are making an offer for a house that is likely to sell quickly, a larger earnest money may help get your offer accepted.
The next payment is the down payment. This is a percentage of the agreed price that you pay to reduce the amount of money you have to borrow. You can put as much money down as you want. The traditional amount is 20 percent of the purchasing price but it is possible to find mortgage loans that require as little as 3 to 5 percent. Any down payment lower than 20 percent would require you to purchase a Private Mortgage Insurance which is added to your monthly installment. This is to protect the lender if you default on the mortgage. PMI can be cancelled as soon as you have built equity equal to 20 percent of the value of the house. The more money you put down, though, the less you have to finance and the lower your monthly installment will be.
The third payment you will make is for closing costs which covers all the paper work needed to buy the house. Closing costs are usually between 3 to 4 percent of the purchasing price of the house.
The monthly mortgage installment you will make is composed of the following costs, appropriately known by the acronym PITI.
- Principal – The total amount of money you are borrowing from the lender (after your down payment). In the early years of a fixed rate mortgage, you pay more of interest. In the later years you pay more of the principal.
- Interest – The money the lender charges you for the loan. It is a percentage of the total amount you are borrowing. Principal and interest comprise the bulk of your monthly installment in a process called amortization, which reduces your debt over a fixed period of time. With amortization, your monthly payments are largely interest during the early years and principal later. In addition to your principal and interest, your mortgage payment could include money that is deposited in an escrow account to pay certain taxes and insurance.
- Taxes – Money to pay your property taxes is often out into an escrow account, a third party entity that holds accumulated property taxes until they are due.
- Insurance – Most mortgages require the purchase of hazard insurance to protect against losses from fire, storms, theft, floods and other potential catastrophes. If you own less than 20 percent of equity in your home, you may also have to buy Private Mortgage Insurance.
Equity is the value of your home minus your remaining principal balance.
By Destiny Page