Friday, August 25, 2006

About Mortgages

What is mortgage? A mortgage is a legal contract that says that if you don't pay your loan to the lender, the lender can repossess your home and sell it. So it is very important to know whether or not you can afford paying the monthly payment before deciding what kind of house you want to buy.

What does the monthly mortgage payment made up of?
1) Principal. This is the total money you are borrowing from the lender (after your down payment).
2) Interest. This is what the lender charges you for the loan, which is the percentage of the total amount of money you are borrowing.
3) Taxes. This is property taxes. Money you pay into the property tax are usually put into an escrow account, which is handled by a third party. A portion of your property tax is added to your mortgage payment and are held in an escrow account until it is time to pay the state the property tax (which is usually once a year).
4) Insurance. These are usually just hazard insurance to protect your home against fire, flood, wind, theft, etc. It may include a PMI (Private Mortgage Insurance) if you did not make a down payment of at least 20%. PMI protects lenders in case you default on your loan.

How do payments work? In the first several years, majority of your payments are paid toward the interest. As time goes on, more of your monthly payment will go toward the principal.

Before you go out and look to buy a home, you should first see if you qualify for a mortgage. There are two types of the qualification process. One is called "pre-approved" and the other is "pre-qualified." While these two words sound similar, the qualification process is different. When you are "pre-qualified," that means you given the lender your income level, your credit and debt information, and the lender ESTIMATES what you can afford. When you are "pre-approved" this means that the lender has done the extra work to put you CLOSER to the loan. Pre-approval process consists of: Credit report check, debt-to-income ratio check, and in depth analysis of your current financial situation.

In the next few blogs, I will talk about various types of mortgages. These are:
1) Interest Only
2) Balloon Mortgage
3) Adjustable Rate Mortgages (ARMs)
4) Fixed-rate mortgage
5) Government mortgages such as FHA or VA