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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
PITI
The four elements:
Principal
+ Interest
+ Taxes
+ Insurance
= Your monthly payment
Principal:
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!
Interest:
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.
Taxes:
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.
Insurance:
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:
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! |
