If you are thinking about applying for a mortgage to finance your home purchase, you are in good company. 87% of home buyers financed their home purchase in 2021. Many clients ask us what the different elements that make up their mortgage are.
The down payment is the amount of money that you have saved and are paying directly for the home. The bigger the down payment the better because it will save you money in the long term. The ideal scenario is to put down 20% or more of the purchase price; so if you purchase a home for $400,000, a 20% down payment would be $80,000. If a 20% down payment is not realistic, you can put down as little as 3.5% with a FHA loan (a special type of loan backed by the government) or even 0% if you are eligible for a veterans loan.
The principal is the amount of money that you are borrowing. Using the previous example, if you purchase a $400,000 home with a 20% down payment, your principal is $320,000. This is the amount that you will need to repay over time.
The interest rate is “the monetary charge for the privilege of borrowing money.” The amount can be fixed over time (called a fixed interest rate) or may fluctuate (called an adjustable rate). By putting down a larger down payment, you can qualify for a lower interest rate because the lender views your loan as less risky since you have more of your own money invested in the home. Many lenders allow borrowers to pay back additional principal each month in addition to their required mortgage payment. This is a great way to repay your loan sooner and reduce your total interest payment.
Taxes and Insurance
The principal and interest comprise the bulk of your monthly mortgage payment. However, your payment may also include property taxes. When this occurs, the bank pays your property taxes on your behalf.
Other monthly costs for your mortgage are private mortgage insurance (PMI) and home insurance. If your down payment is less than 20% of the purchase and you have a conventional or FHA loan, you will need to purchase PMI to provide repayment coverage to the lender in case you default on the loan. Regardless of down payment size, all lenders must purchase homeowners insurance to protect the home against hurricanes, fires, water damage, or other catastrophes. PMI and homeowners insurance are paid separately from your mortgage payment, but it’s still essential to include them in your budgeting.
Choice Mortgage Group is committed to transparency in our loans. If you have questions about the breakdown of your monthly mortgage payment, PMI requirements, or options to help pay down your loan faster, contact your loan originator today.
Since 1995, Choice Mortgage Group has been providing homeowners with the best real estate financing programs available. As a licensed lender, we offer a wide variety of services and programs that satisfy the unique needs of each of our clients.
Specializing in residential mortgage lending for over 25 years, our programs include conventional and government lending, purchases, and refinances. We also offer portfolio lending for self-employed borrowers and borrowers with complicated tax situations. South Florida is where Choice Mortgage Group started, and we like to call it home. We are devoted Florida Atlantic University Owls fans and are proud to be the official mortgage lender of FAU Athletics. We also support numerous other local organizations. For more information about Choice Mortgage Group, visit www.choicemortgage.com.
Choice Mortgage Group
40 SE 5th Street, Suite 502
Boca Raton, FL 33432
 National Association of Realtors. 2021 Home Buyers and Sellers Generational Trends Report. 2021-home-buyers-and-sellers-generational-trends-03-16-2021.pdf (nar.realtor). Pages 83-84. Accessed March 21, 2022.
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