If you’re not a homeowner, you might be confused by all the financing lingo. Learn more by understanding the basic terms used to describe a mortgage.
A mortgage is a loan to finance your home purchase, and uses the home as your collateral, which the lender can take back if you don’t pay your debt. That debt is usually paid monthly, and payments include PITI, or Principal, Interest, Taxes and Insurance.
Principal is the sum you borrow, reduced by how much you can afford as down-payment. Interest, as a percentage rate, is what the lender charges as a fee to use the money you’ve borrowed. These two items make up most of your payment, and “amortization” over the life of the loan makes early payments mostly interest, while later payments mostly apply to principal.
Taxes are the local levies, based on the value of your home, used to fund schools, roads, and other services in your community. These taxes due to your local county are paid directly by you or may be paid by your lender on your behalf from funds held in your escrow account. Many buyers choose to put a little extra in their monthly payment to be held in the escrow account. They find it’s a lot easier to put a little aside each month instead of having to come up with the larger amount when the taxes or insurance are due.
Insurance is required by the lender to protect your home against loss and damage. Private Mortgage Insurance protects the lender against riskier loans, and many buyers couldn’t afford to buy a home with out it. Thus begins your education toward a smart and secure home purchase!