Getting Your First Mortgage? Be Sure To Understand These Terms
If you are preparing to buy a home for the first time, chances are high that you'll need a mortgage to help pay for it. The process of getting a mortgage can be confusing for first time home buyers, which is why it helps to know about the following terms that will be used by your mortgage lender.
Principal Payments
The total cost of your mortgage is a combination of interest and principal. The interest is the fee that you pay to the mortgage lender for having the mortgage, while the principal is the money that goes toward paying for the actual home.
Amortization Schedule
All loans have an amortization schedule, which is how your monthly payment is separated between interest and principal payments. It is very common for the start of the mortgage to have you pay a high percentage of interest and a low percentage of principal. As the loan continues, the ratio will even out and eventually flip towards the monthly payments having more money going towards the principal. You can look at the amortization schedule to figure out the exact dollar amounts that go toward the principal and interest for each monthly payment.
PMI
Private mortgage insurance is a type of insurance required for many loans if you have less than a 20% down payment. This insurance gives the lender protection in case you are unable to make mortgage payments and need to foreclose. It is possible to have PMI waived in some types of loans after you've paid 20% of the home's principal.
DTI
Your debt-to-income ratio is based on your total income each month and how much of that goes towards paying off debts. There are limits to how big that percentage of debt payments can be while you still qualify for a home, which is typically no higher than 43%.
Points
It is possible to lower your interest rate by purchasing points towards your mortgage. This is money that you pay up front in exchange for a slightly lower interest rate. You'll need to calculate how many years it takes to break even on the points that are purchased to determine how long you must stay in the home to make it worth it.
Balloon Payment
Some loans require a balloon payment one an initial term has been reached. This is a large lump sum that you must pay all at once when the terms of the mortgage are over with.
For more information, contact a mortgage lender.
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