This is part two in a five part series on what you need to know about mortgages before you buy a home. The housing market is an interesting beast, because it comes and goes, rises and falls, allows some people to flourish and brings others to ruins. If you want to understand how the housing market works, you should begin with an introduction to mortgages.
Taxes - Taxes is money for property taxes that is often included in the loan payment, put into an escrow account. What this means is that the money goes into the hands of a third party until certain conditions have been met or until a point where it is time for you to pay your annual property taxes. A portion of these property taxes will be added to your mortgage payment every month and will be held in an escrow account until they are due.
Insurance - There are several different types of insurance that can end up coming into play when you get your mortgage. You are going to want to have hazard insurance, which will protect you against fire losses, storm losses, theft losses and other similar hazards. If your home is located in a flood zone, then you are going to have to get flood insurance as well, especially if your loan is being federally insured. Unless you have 20 percent or more equity in your home, then you are also going to have to get PMI, which is known as private mortgage insurance. This is sometimes capable of becoming quite expensive, and for that reason it makes sense for you to put as much as you possibly can into your down payment. Equity is defined as being the portion of the value of your home that has already been completely paid for.
All of these pieces of your payment for your mortgage are known as PITI. There are also closing costs that you are going to need to pay. Mortgages are most commonly paid off in increments that allow you to chip away gradually at the loan's principal while paying for interest and other things. What this is known as is amortization. The portion of your mortgage payment that is going to the interest payment is going to be a lot higher than how much is going to principal, at least for a period of several years while you are paying off your mortgage.
Your payments will be calculated quite precisely, and they will be scheduled in such a way that you can pay the loan off in a pre specified amount of time. You might want to experiment with a mortgage calculator in order to see what an average amortization schedule looks like as well as to gain an understanding of how it can change based on the loan's time span.
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