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Some of the terminology used by mortgage folks can be downright confusing... Here's what they are really saying.

>In this example, let's borrow $100,000 for 30 years at 8%.
(You can cut the figures in 2 for a $50,000 deal... or by 4 for a $25,000 deal.) >  >Elements of a Mortgage Payment

The four elements:
Principal + Interest + Taxes + Insurance = Your monthly payment

When you borrow money for a mortgage, you repay the Principal over a period of time stated in the Deed of Trust.... most likely 30 years. You repay the some of the Principal each month. The amount will increase slightly each month as you slowly pay it down. After the first year on the above loan, you still owe: $99,164.64. Don't despair!

With each mortgage payment, you pay interest accrued for the previous month. So when buying, you pay over your shoulder... when renting, you pay in front of you. The amount of interest will slightly decrease each month... at the end of the first year, you've paid: $7969.81. If you take all 30 years to repay the loan, total interest is: $164,155, but don't despair-- you took all that interest off your taxes and you now OWN your home!

>For our deal, the Principal and Interest per month is: $733.76.

In most cases, mortgage companies demand that Real EstateTaxes are included in your mortgage payment. They divide the estimated annual amount by 12. In Danville, the taxes for a $100,000 house are around $680... divided by 12 = $56.67.

Mortgage companies also insist that property Insurance is carried to protect their interest. You will have to make a decision when you get your insurance... do you get what you owe, or do you get "Replacement Value?" This answer (to me) is simple... get the replacement value because lumber, labor, etc., are more expensive today than yesterday, and your home should appreciate (increase in value over time).

>Insurance for our deal: about $30/month.

In most cases, lenders also require Private Mortgage Insurance to protect against foreclosure. With a 20% down payment it is not required.

>For our deal: about $40/month. >So, total monthly payment is:
$733 +$57 + $30 + $40 = $860 per month.

Points are upfront interest. Most loan companies charge one point as an origination fee. Additionally, you can pay points to "buydown" the interest rate... if the going rate is 8% with zero points, then a 7.5% rate could be bought for two points.

One point equals 1% of the loan amount... ie., a $100,000 loan = $1000. Paying points may or may not save you money... you have to look at the difference between house payments. Here's an example:

You are financing $100,000 for 30 years.

At 8%, your monthly P+I = $733.76

At 7.5%, your monthly P+I = $699.21 (34.55 difference)

2 points = $2000, divided by $34.55 = 58 months = 4.8 years.


SO: If you pay the 2 points, you will break even in just under 5 years and actually save $34.55 per month thereafter!

Qualifying - What mortgage amount can you qualify for?
Mortgages - Types of mortgages and special programs.
Interest Rates - Interest Rates and how they affect your investment.
Assessments/Appraisals - You need to know the difference!
Back to the Finance Page - How you finance your property is critical!