Mortgage

Your Mortgage Payment

A mortgage is a loan that is used to purchase real estate, and a mortgage service is a company or organization that provides mortgages to borrowers. Mortgage services can include a variety of different types of organizations, such as banks, credit unions, mortgage companies, and government-backed entities.

  • Mortgage services typically provide a variety of different types of mortgages, including fixed-rate mortgages, adjustable-rate mortgages, and government-backed loans. Each type of mortgage has its own set of terms and conditions, such as the interest rate, the length of the loan, and the down payment required.
  • Mortgage services will typically evaluate a borrower’s creditworthiness and financial situation to determine the size of the loan they can approve and the terms of the loan. This process is known as underwriting. They will also handle the paperwork and legal aspects of the mortgage process, including title searches, property appraisals, and recording the mortgage with the appropriate government agency.

Mortgage payments consider four factors – your home price, down payment, mortgage interest rate and loan type – to estimate how much you will pay each month. Here’s a breakdown with an explanation of each factor and how it influences your payment.

Mortage Tools


What is required for FANNIE MAE financing of a second home?

Second Home Requirements
must be occupied by the borrower for some portion of the year
is restricted to one-unit dwellings
must be suitable for year-round occupancy
the borrower must have exclusive control over the property
must not be rental property or a timeshare arrangement1
cannot be subject to any agreements that give a management firm control over the occupancy of the property
must be underwritten in DU and receive an Approve/Eligible recommendation, except for high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).
  • If the lender identifies rental income from the property, the loan is eligible for delivery as a second home if the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).
  • An LLPA applies to certain loans secured by second homes. This LLPA is in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.
  • For more information related to occupancy types, refer to B2-1.1-01, Occupancy Types.
  • For maximum allowable LTV/CLTV/HCLTV ratios and credit score requirements for a second home,
    see the Eligibility Matrix.

Home Price
Home price is based on your income, monthly debt payment, credit score and down payment savings.

One of the rules you may hear as a homebuyer is the 28/36 rule or the debt-to-income (DTI) rule. This rule says that your mortgage payment shouldn’t go over 28% of your monthly pre-tax income and 36% of your total debt. This ratio helps your lender understand your financial capacity to pay your mortgage each month. The higher the ratio, the less likely it is that you can afford the mortgage.

Here’s the formula for calculating your DTI:

  • DTI = Total Monthly Debt Payments ÷ Gross Monthly Income x 100
  • To calculate your DTI, add all your monthly debt payments, such as credit card debt, student loans, alimony or child support, auto loans and projected mortgage payments. Next, divide by your monthly, pre-tax income. To get a percentage, multiply by one hundred. The number you’re left with is your DTI.

Down Payment
Many mortgage lenders expect a 20% down payment for a conventional loan with no private mortgage insurance (PMI). Of course, there are exceptions.

One common exemption includes VA loans, which don’t require down payments, and FHA loans often allow as low as a 3% down payment (but do come with a version of mortgage insurance). Additionally, some lenders have programs offering mortgages with down payments as low as 3% to 5%.

In general, most homebuyers should aim to have 20% of their desired home price saved before applying for a mortgage. Being able to make a sizable down payment improves your chances of qualifying for the best mortgage rates. Your credit score and income are two additional factors that play a role in determining your mortgage rate and, therefore, your payments over time.

Mortgage Rate
For the mortgage rate box, you can see what you’d qualify for with our mortgage rates comparison tool. Or you can use the interest rate a potential lender gave you when you went through the pre-approval process or spoke with a mortgage broker.

If you don’t have an idea of what you’d qualify for, you can always put an estimated rate by using the current rate trends found on our site or on your lender’s mortgage page. Remember, your actual mortgage rate is based on several factors, including your credit score and debt-to-income ratio.

Loan Type
Selecting a 30-year fixed-rate mortgage, 15-year fixed-rate mortgage or 5/1 ARM.

The first two options, as their name indicates, are fixed-rate loans. This means your interest rate and monthly payments stay the same over the course of the entire loan.

An ARM, or adjustable-rate mortgage, has an interest rate that will change after an initial fixed-rate period. In general, following the introductory period, an ARM’s interest rate will change once a year. Depending on the economic climate, your rate can increase or decrease.

Most people choose 30-year fixed-rate loans, but if you’re planning to move in a few years or flipping the house, an ARM can potentially offer you a lower initial rate.

Costs Included in Your Monthly Mortgage Payment
Here are two formulas to visualize the costs that are included in your monthly mortgage payment:

  • Monthly mortgage payment = Principal + Interest + Escrow Account Payment
  • Escrow account = Homeowners Insurance + Property Taxes + PMI (if applicable)

The lump sum due each month to your mortgage lender breaks down into several different items. Most homebuyers have an escrow account, which is the account your lender uses to pay your property tax bill and homeowners insurance. That means the bill you receive each month for your mortgage includes not only the principal and interest payment (the money that goes directly toward your loan), but also homeowners’ insurance, property taxes, and, in some cases, private mortgage insurance and homeowners’ association fees.

Here’s a breakdown of these costs.

Principal and Interest
The principal is the loan amount that you borrowed, and the interest is the additional money that you owe to the lender that accrues over time and is a percentage of your initial loan.

Fixed-rate mortgages will have the same total principal and interest amount each month, but the actual numbers for each change as you pay off the loan. This is known as amortization. You start by paying a higher percentage of interest than the principal. Gradually, you’ll pay increasingly principal and less interest.

Homeowners Insurance
Homeowners insurance is a policy you purchase from an insurance provider that covers you in case of theft, fire or storm damage (hail, wind, and lightning) to your home. Flood insurance is a separate policy. Homeowners insurance can cost anywhere from a few hundred dollars to thousands of dollars depending on the size and location of the home.

When you borrow money to buy a home, your lender requires you to have homeowners’ insurance. This type of insurance policy protects the lender’s collateral (your home) in case of fire or other damage-causing events.

Property Taxes
When you own property, you are subject to taxes levied by the county and district. You can input your zip code or town name using our property tax calculator to see the average effective tax rate in your area.

Property taxes vary widely from state to state and even county to county. For example, New Jersey has the highest average effective property tax rate in the country at 2.42%. Owning property in Wyoming, however, will only put you back roughly 0.57% in property taxes, one of the lowest average effective tax rates in the country.

While it depends on your state, county, and municipality, in general, property taxes are calculated as a percentage of your home’s value and billed to you once a year. In some areas, your home is reassessed each year, while in others it can be if every five years. These taxes pay for services such as road repairs and maintenance, school district budgets and county general services.

PMI
Private mortgage insurance (PMI) is an insurance policy required by lenders to secure a loan that’s considered high risk. You’re required to pay PMI if you don’t have a 20% down payment and you don’t qualify for a VA loan. The reason most lenders require a 20% down payment is due to equity. If you don’t have high enough equity in the home, you’re considered a default liability. In simpler terms, you represent more risk to your lender when you don’t pay for enough of the home.

PMI is calculated as a percentage of your original loan amount and can range from 0.3% to 1.5% depending on your down payment and credit score. Once you reach at least 20% equity, you can request to stop paying PMI.

HOA Fees
Homeowners’ association (HOA) fees are common when you buy a condominium or a home that’s part of a planned community. HOA fees are charged monthly or yearly. The fees cover common charges, such as community space upkeep (such as the grass, community pool or other shared amenities) and building maintenance.

When you’re looking at properties, HOA fees are usually disclosed upfront, so you can see how much the current owners pay per month or per year. HOA fees are an additional ongoing fee to contend with, they don’t cover property taxes or homeowners’ insurance in most cases.

How to Lower Your Monthly Mortgage Payment
There are four common ways to lower your monthly mortgage payments:

  1. Choose a long loan term
  2. Buy a less expensive house
  3. Pay a larger down payment
  4. Find the lowest interest rate available to you

You can expect a smaller bill if you increase the number of years, you’re paying the mortgage. That means extending the loan term. For example, a 15-year mortgage will have higher monthly payments than a 30-year mortgage loan, because you’re paying the loan off in a compressed amount of time.

An obvious but still important route to a lower monthly payment is to buy a more affordable home. The higher the home price, the higher your monthly payments. This ties into PMI. If you don’t have enough saved for a 20% down payment, you’re going to pay more each month to secure the loan. Buying a home for a lower price or waiting until you have larger down payment savings are two ways to save you from larger monthly payments.

Finally, your interest rate impacts your monthly payments. You don’t have to accept the first terms you get from a lender. Try shopping around with other lenders to find a lower rate and keep your monthly mortgage payments as low as possible.



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