Published: November, 2019
There are key components that determine what your mortgage will be. Learn more about each of these below.
KEY MORTGAGE COMPONENTS
- Interest Rate: The interest rate is a percentage of your loan amount charged by your lender in order to borrow the money to buy your home. Factors that determine your interest rate include the current market conditions, credit score, down payment amount, and the type of mortgage.
- Discount Points: Discount points, which are optional, allow you to pay interest at the time of closing to obtain a lower interest rate on a loan. If you qualify, you can use these points to lower your interest rate, which will result in lower monthly mortgage payments. One point is equivalent to 1% of your loan amount. For example, if you are going to borrow $300,000 on your loan, one point would equal $3,000.
- Loan Term: The loan term is the amount of time available to pay off your mortgage. The loan term is determined by the mortgage option you choose. A shorter loan term usually results in a higher monthly payment, but you will pay less interest. A longer loan term usually results in a lower monthly payment, but you will pay more interest.
- Mortgage Payment: Payments are always composed of two elements: the principal, which is the amount of money you borrowed for the home, and the interest, which is the cost of borrowing the money.
- Property Taxes: Property taxes are charged by the government. The lender may choose to collect a portion of these taxes in every mortgage payment. If so, the lender will hold the tax funds in an escrow account (a holding account typically by a third party). The lender will use these funds to pay your property taxes once due.
- Homeowner's Insurance: The lender may choose to collect a portion of this insurance in every mortgage payment and hold it in an escrow account. If so, the lender will use the funds to pay your homeowner's insurance once due.
- Private Mortgage Insurance: Depending on your loan program, Private Mortgage Insurance (PMI) may be required when the down payment is less than 20%. The lending institution requires this insurance to protect itself in case the buyer is unable to pay their mortgage. The lender holds the funds in an escrow account and pays the insurance when due.
- Origination Fee: The origination fee is the amount we, the lending institution, charge for originating the loan. The charge includes fees, documentation preparation, underwriting costs, and other expenses.