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Understanding the Building Blocks of a Mortgage
If you’re considering a new home with a mortgage, determining your monthly payment isn’t always cut and dry – you may think that you know what the amount will be when you start home shopping, mortgage calculator in hand, but the biggest factors in your mortgage payment will be PITI. Pronounced like the word “pity,” this handy acronym stands for the four parts of your monthly payment.
Principal
Principal
The principal is the meat of your loan – this is used to pay down the balance of the loan, or the cost of your home. The combination of your down payment and principal is the amount of equity that you have in the home. The amount of principal that you pay off each month will not fluctuate unless you refinance the loan or take out an equity loan.
Interest
Any Homeowner will tell you that interest is one of the most important calculations in buying a home. The interest is determined by the Federal Reserve, demand for U.S. Treasury notes and the banking industry. Whenever the interest rates are low, it might behoove you to refinance for a lower rate and fewer expenses on your home. Folks are reticent to purchase a new home whenever the interest rates are high.
How much of a difference are we talking? According to MoneyUnder30.com, a one percent difference in interest on a $160,000 mortgage increases the monthly payment by almost $100. Over the life of the loan, the one percent rate means approximately $30,000 more for the same home!
Taxes
Uncle Sam loves your new home! He also wants to make sure that you love the roads, infrastructure and schools around the home. Property taxes vary wildly by state and community but it can be a significant portion of your mortgage payment. Taxes are calculated based on the value of the land and improvements. Speak with a local Sales Consultant or Real Estate Agent who will have the actual numbers for the area you’re looking at and everything the taxes encompass.
Taxes
Insurance
Now that you have your dream home, you need to protect it from fire, flood and damage. Insurance premiums are influenced by the liability associated with the age of the home, square footage, number of occupants, construction type and many more factors! The “I” in PITI also stands for mortgage insurance, which is generally required when the down payment on the home is less than 20%.
PITI makes up the biggest building blocks of a monthly mortgage and will be helpful when considering buying a new home. Research as much as possible to understand the finances… You can be sure that the mortgage lender will do the same!
