Financing 101!
If you’re not a homeowner, you might be confused by the brouhaha surrounding loan defaults and foreclosures. Learn more by understanding the basic terms used to describe a mortgage.
A mortgage is a loan to finance your 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 offer 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 are paid directly by you or by your lender on your behalf from funds held in an escrow account.
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 without it. Thus begins your education toward a smart and secure home purchase!
Bennington VT, Buying
