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- Principal – The amount of the payment that goes towards paying down the loan amount. Since, for most loans, part of your mortgage payment gets applied towards principal, over time, your outstanding principal balance will go down.
- Interest – The interest rate lenders charge is the cost of the borrowed money. The interest and principal payments equal your monthly mortgage payment.
- Taxes – The local government where the home is located will assess your home and determine its real estate taxes. Most lenders will collect this as part of your monthly payment and then pay your local government on your behalf. This is commonly referred to as tax escrow.
- Insurance – Homeowner’s insurance (or hazard insurance) covers you in the event of damage to your property caused by fire, wind, or other hazards.
For some buyers, monthly housing costs may also include homeowners association dues, condominium fees, and mortgage insurance. The Marylan Real Estate Center provides you with extensive financing information to help you better understand your options.
Use this Mortgage Affordability Calculator and our many other Mortgage Calculators to better understand how much you can afford.
Down Payment Sources
The traditional source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not so obvious sources.
- Home Equity Loan – Parents often have considerable equity built up in their own homes, and through a home equity loan, can gift a down payment for a home to their children. Often lenders will require a “gift letter” to verify the parents don’t expect repayment. In return for providing a part of the down payment, the parents (or another investor) share in the profit or net equity of the house when it is eventually sold. Ask your tax advisor for current information.
- Life Insurance – If you have built up a cash value on your life insurance policy, you may be able to borrow up to this amount from your insurance company. You may even get a more favorable interest rate for this type of loan.
- Stocks and Bonds – You may be able to secure a bank loan using your portfolio as security, without selling your stocks and bonds.
- Company Profit Sharing or Savings Plan – Look into the possibility of withdrawing or borrowing against what you have in your employer’s profit sharing or savings plan account.
Don’t plan to put your last penny down on the closing table. The larger the down payment, the less money you need to borrow. However, you will still need money for closing costs, moving, setting up your new home, and other miscellaneous expenses.
Pre-qualification vs. Pre-approval
Knowing your affordable price range will bring your house hunting into focus. How much money you qualify for will depend on a variety of factors including credit history, length of employment, and down payment amount.
Based on information you provide, your lender can estimate how much money you can borrow before applying for a loan. This non-binding process is called pre-qualifying. Your lender can also take detailed look at your financial and credit profiles (including a credit check) and commit to lending you a specified amount of money pending specific property details. The lender will then provide you with a letter stating how much mortgage you qualify for. This process is called pre-approval. With a pre-approval letter, you can:
- Shop for a home with the confidence of knowing exactly how much you can afford.
- Show sellers you are serious about buying and that you can afford to make a purchase.
- Discover any qualification issues early in the home buying process.
Mortgage Insurance
If you obtain a conventional loan, depending on your loan program and down payment amount, you may be required to buy private mortgage insurance (PMI). This insurance protects the lender in case you default on the loan, allowing the lender to approve a larger loan amount.
Mortgage insurance offers a variety of payment options, including making an initial payment at closing or making monthly payments with the house payment. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender and carefully compare benefits prior to making a loan commitment. Plus you can feel free to contact me with any questions you may have and I'm happy to put you in touch with some reliable home financing experts.