A homeowner gets approved fast of his mortgage application especially if it is his first time to apply for such a loan. The problem with mortgage, however, lies not on whether an application will get approved or not; it is more of a question of “Will I be able to pay it on a timely manner?” The best way to answer this question is to know how a mortgagee is billed on a monthly basis.
Not one but four
A mortgage bill contains four parts. See how it would reflect in the Statement of Account.
Let’s say a homeowner gets approved of a $100,000 mortgage payable in 10 years. How his monthly payment should be computed? Would that be $100,000 divided by 120 (12 months in a year x 10)? No.
A mortgage bill contains four parts and the $100,000 is the principal amount, just a part of the four. This means that the mortgagee would pay more than $100,000 within the ten year’s time.
These four parts, known as PITI, are the following:
1. Principal – This is the amount borrowed. In the example above, the approved mortgage amount of $100,000 is the principal.
2. Interest – Every bank or mortgagor charges an interest. This is where mortgagor gets income from. Interest rates vary. A homeowner should ask the mortgagor for the interest rates of different types of mortgage plans that a mortgaging company offers. Also, the homeowner should compare rates of a number of banks and mortgage companies to get the lowest rates and the best deal.
3. Taxes – The local government charges a mortgagee taxes and is paid during tax period. Taxes are included in the monthly mortgage payment and are placed in an escrow account. The escrow account will be emptied to pay for the taxes during tax period filing and payment.
4. Insurance – Most mortgagors require homeowners to have these two kinds of home insurance during the mortgage period: hazard and flood insurance. There are other types of insurance that a homeowner can apply for to protect his interests, even if the mortgagor didn’t require it. True that these insurance plans add up to a mortgagee’s monthly fees, but it protects him also from natural disasters that might get his home destroyed within the mortgage period. If a mortgaged home gets destroyed in a flood, for instance, the homeowner is required by law to repair his home and return to its state before the incident. A home insurance would pay for these repairs.
Check your statement
A homeowner should check his Statement of Account meticulously. He should see to it that he pays only for these four parts. There shouldn’t be any other fees other than these four. If he finds extra fees on his statement of account, he should call the mortgagor immediately and ask what these extra fees are for. Afterwards, he should go to the nearest local government agency, such as the Department of Housing and Community Development, and ask if these extra fees are required by the law.
Can you afford it?
Knowing PITI would give an homeowner an idea how much his monthly mortgage payment would be. Can you afford it? Can you pay the montly payment within five years? These are the questions that a homeowner can answer with certainty with PITI. So before plunging into the tempting offer of a mortgagor, grab a calculator and do some number crunching.