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The Basics of Financing

A mortgage is a loan that a bank or mortgage lender gives you to help finance the purchase of a property. Typically, it is paid in monthly increments and made up of four parts. The four components, also called P.I.T.I., make up your main home expenses each month.

  1. Principle: the balance on your loan apart from interest.

  2. Interest: the interest paid on the life of your loan in monthly increments.

  3. Taxes: the property tax payment on your home in monthly increments

  4. Insurance: referred to as hazard or homeowners insurance, this protects your home and certain possessions. It can protect from liability claims or lawsuits for accidents on your property.

The principle and interest go to the lender or bank to repay the mortgage. The taxes and insurance are factored into your payment to your lender, but are held in an escrow account and paid on your behalf from that account.

In addition to these four items, you may also need to factor the following possible monthly costs when estimating your budget.

  • Private mortgage insurance (PMI): this is a form of insurance that is required when a homebuyer takes out a conventional mortgage loan for more than 80% of the home’s total value. The added insurance protects the lender against loss if the borrower defaults on the loan.

  • Monthly mortgage insurance: homeowners with a Federal Housing Administration (FHA) loan, which only requires 3.5% minimum down payment, are required to pay monthly mortgage insurance even if they make a larger down payment.

  • Homeowners Association Fees (HOAs): an HOA is an organization that enforces covenants and rules for the community and maintains shared property such as open spaces, parks, and community pools. If you buy a property in a community with a HOA, you will become a member of that HOA and will become responsible for any HOA fees.

  • Additional Taxes: check to see if the property you want to buy is located in a special district, sometimes called a Community Facilities District (CFD). Property owners in these districts pay additional taxes to fund public improvements such as schools, parks, and roads.

If you have questions about any of these terms used in the mortgage world, reach out and I can make sure you get answers.

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