What Makes Up A PITI Mortgage Payment?

What Makes Up A PITI Mortgage PaymentMany mortgage payments are made up of four parts, called PITI. PITI is an acronym that stands for principal, interest, tax, and insurance. It’s important to understand PITI because it is the real number you need to use in order to find out how much mortgage you can afford to pay each month.

One of the biggest mistakes first-time homebuyers make is using only the principal plus interest figure to calculate how much they’ll be paying every month for their mortgage. Then, when the lender comes back and denies them, the prospective buyer is confused. Knowing and understanding PITI will put you back in the driver’s seat with your home buying goal.

Principal

The principal part of your mortgage payment represents the amount of money that you borrow over the terms of the loan. For instance, if you borrow $100,000 and you have 20 years to pay them back, the principal that you’ll pay each month equals $100,000 divided by 20.

Interest

The interest portion of your mortgage payment is the percentage rate that your lender is charging you to borrow from them. Another way of looking at the interest is to think of it as the cost of borrowing money. Interest will be spread out over the length of the loan, just like the principal payment.

Tax

The tax portion of your monthly mortgage payment pays for real estate and/or property taxes. Real estate taxes are assessed by the local government where the properties located. The tax rate is determined by the government and is not influenced by your personal credit score.

Insurance

The insurance part of your monthly mortgage payment pays for homeowner’s insurance and/or private mortgage insurance. If you put less than 20% down on your home purchase, you’re required to have private mortgage insurance. This amount can add considerably to your monthly mortgage payment, so it’s worth it to try to hit that 20% threshold.

Otherwise, you have to wait until your loan to value ratio is 80/20. After that, you can request to drop the private mortgage insurance, but the homeowner’s insurance will still be part of your monthly payment.

Now that you understand what makes up a PITI mortgage payment, you’ll be better prepared to plan for your monthly budget that includes a mortgage payment.

Whether you are in the market for a new home or interested in refinancing your current property, be sure to contact your trusted home mortgage professional to learn about your current financing options.

Surprising Things That Can Derail A Closing

Surprising Things That Can Derail A ClosingOnce you and the seller have negotiated an offer and you’ve been pre-approved for a mortgage, you might think that you are in the clear as far as your closing goes. However, that is not always the case. Many surprising things can put a halt to closing. Some may ultimately stop the closing altogether while others could simply cause a delay.

Here are a few unexpected things that can derail a real estate closing:

A Job Promotion 

While you might know that changing employers is one way to interfere with the closing, another deal-breaker can be switching positions with your current employer. If you are a salaried employee and switch to a non-salary commission job, for instance, you could be looking at a problem when it comes to closing on a house.

Whenever you have any change in employment, even if it is with the same employer, most lenders will require a two-year history. A new job title could be a problem at closing — even if the new position pays more money. In some cases, the lender might not be able to include the income from your new job. If so, you could quickly end up not being qualified for the loan.

Therefore, it’s best to avoid any change in employment until after closing even if it is with the same company. Talk with your mortgage finance professional regarding your personal circumstances before making any employment changes.

Last-Minute Requests for Documents

It is easy to assume that lenders will already have all the documents that they need by closing, but that is not necessarily the case. Lenders can become overwhelmed with work, especially during a hot real estate market. Lenders will sometimes realize that they need more information last-minute.

They might ask for a canceled check, copies of your rental agreement, current pay stubs or other items. If you don’t have the documentation handy, it could cause your closing to be delayed or even completely canceled if you can’t produce the requested information.

To avoid this situation, make sure that you consistently communicate with your lender throughout the loan process.

A Delayed Transfer 

You will most likely need cash at closing. If you are relying on your bank to transfer funds right before closing, then you might be shocked if the transfer falls through at the last minute. Bugs in the bank’s system or other issues could affect the transmission.

Therefore, make sure you time your transfer to reach you or your closing agent a couple of days before closing.

Closing on a mortgage is something that you don’t want to derail. Avoiding the above mistakes will help ensure a hassle-free closing transaction.

From pre-approval to closing, remember that you can count on your trusted mortgage professional to remain committed to your success throughout the entire home buying process.

5 Key Factors That Affect Your Mortgage Rate

5 Key Factors That Affect Your Mortgage RateMany first time home buyers often wonder what factors determine their mortgage rate. Is it their credit score? Is it the type of loan chosen? Is it the size of the loan?

The truth is, there are many factors at play. Mortgage interest rates are not standardized across the board, so they vary from lender to lender and from borrower to borrower.

Here are 5 common factors that determine or affect your mortgage interest rate:

1.    Default Risk

Risk is a key consideration when determining mortgage interest rates. Banks and other lenders are in a risky business because there is always a chance of a borrower defaulting on their loan repayments. This is known as default risk.

Banks and lenders therefore charge riskier borrowers higher interest rates to discourage them from borrowing, as well as to be able to average their returns between risky and non-risky borrowers. Risk is one of the prime factors that influence your mortgage rate.

2.    Credit Score

Perhaps you are wondering how banks and other lenders determine if you are a risky or non-risky borrower. There are many tools they can use, but your credit score plays a big role. You credit score is based on the borrowing history in your credit report, which summarizes all details about your credit card balances and timely bill repayment.

If you pay your bills on time and sustain relatively low credit scores, your credit score stays high and lenders view you as a low-risk borrower. Consequently, your mortgage interest rates tend to be lower than a person with a low credit score.

3.    Type of Property You Are Purchasing

Some properties have a higher risk of default compared to others. This is determined by analyzing the historical likelihood of default on different properties; lenders use this analysis as the reason to charge higher mortgage interest rates on riskier ones.

For example, vacation homes tend to have a higher rate of default compared to single-family homes and lenders charge higher rates for such homes.

4.    Size of Down Payment

The amount of money you pay upfront on the mortgage also influences its interest rate. A large down payment gives you a lower LTV ratio (loan-to-value), which also decreases the level of risk borne by a lender. A small down payment, on the other hand, gives you a high LTV ratio and thus a higher mortgage interest rate.

5.    Loan Amount

A large loan bears a higher risk than a smaller one simply because there is more money at risk. Most lenders therefore charge higher interest rates on large property loans as compared to smaller ones.

All in all, different lenders offer different rates depending on their style of operation, appetite for risk, or competitiveness in the market. It’s important to search intensively for offers from different lenders for the best mortgage rate.

Contact us to help you find out more about mortgage rates and what that means for your next home purchase.