Mortgages and home loans payments consist of four components: principal, interest, taxes, and insurance. Lenders call these assessments PITI payments, using the first initial of each element. The monthly payment you must pay for a home loan depends on these charges, your initial down payment, and the term of the loan. Interest rates can vary considerably, depending on the down payment and your credit score.
PITI Payment Details
The amount you pay for a home loan depends on numerous factors. You can experiment with online mortgages and home loans calculators to investigate what your payment would be for different loan amounts and various rates of interest. You should search for homes and loans that offer payments you can comfortably make each month, because most foreclosures result from people buying homes they cannot afford. The monthly payments include more charges than the loan principal, so you should keep the following information in mind.
Principal. Lenders calculate principal from the original sales price, minus your down payment and the appropriate percentage of any previous mortgage payments.
Interest. Interest rates can be fixed or variable. Fixed rates never change throughout the loan term. Interest applies to the amount of the current principal balance. If mortgage interest is 6 percent per year, then the interest would be one-twelfth of 6 percent of the current principal.
Adjustable Rate Mortgage. The rate of these mortgage loans fluctuate according to the prime interest rate that banks charge lenders for loans. Adjustable loans usually offer a 3–7 year grace period at a flat rate, which is often lower than regular fixed-rate interest. These types of loans can benefit people who expect to make higher earnings in the future, or young couples who plan to move into a larger home after a few years.
Taxes. Tax payments represent one-twelfth of the real estate taxes local governments assess, and this amount is added to your loan payment each month.
Insurance. Insurance premiums include homeowners’ insurance, which is required, and mortgage insurance, which some lenders also demand to protect their investment.
Preapproval Provides Substantial Benefits
Prequalification and preapproval facilitate buying a home for numerous reasons, but you must first understand the difference between the two terms. Prequalification means you might qualify for a loan of a certain amount. Banks and lenders analyze your financial picture from details you furnish, and they will offer a conditional prequalification for a certain amount. The figure represents a target, but banks often do not analyze the details of your credit history before making this determination. However, getting prequalified starts you on the road to ultimate approval.
Preapproval involves a more formal approach. You must fill out a mortgage application and provide all personal financial details, including documentation. At this point, you have not located a home, so any references on the application should be left blank. The bank will approve a figure, and the terms often include the rate of interest the lender will charge. If possible, you should lock down the rate, so there will be no surprises.
Now that you know exactly how much money you can borrow, you can begin to search for homes in your price range. Preapprovals make the search much more convenient, because you will not have to waste time investigating homes out of your price range. Guaranteed approval will make the process easier for you, the seller, and the real estate agent. The advantages include the following benefits.
– The Buyer. You will benefit more than anyone else. Preapproval means you know exactly how much you can afford. You will not waste time pursuing impossible choices. Approvals eliminate guesswork. You know exactly what your maximum monthly payment will be. If you find a home that costs less, then payments will be substantially lower. Sellers will often reduce price when they know that you are approved for a certain amount. Your bargaining position becomes very strong.
– The Seller. Sellers hate to waste their time, and if they know you are preapproved, they will make every effort to accommodate your inquiries. Some sellers have multiple properties, and knowing your price range allows them to focus on suitable prospects.
– The Real Estate Agent. Real estate agents often try to convince people to buy property they cannot afford. Preapproval categorically identifies the maximum you will pay, so agents will not waste time trying showing you homes outside of your budget.
Mortgages and home loans preapprovals will get you into a new home more quickly, eliminate frustration, and help you locate property you can realistically afford.