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For most folks, financing in terms of a mortgage loan is required in the purchase of real estate, since most people don’t have the capital upfront to buy a piece of property upfront. A mortgage is method of financing a real estate deal to bridge the gap between capital and asking price. A mortgage is a contract that you co-sign with a bank or loan company, pledging the property that you are buying to the lender as collateral for the loan debt. If you fail to make the any loan payments, then the bank/lending company has the right to foreclose on your property and sell the house either at auction, or as an REO (Real Estate Owned property). If you are foreclosed on then you will lose and be evicted from the property.
Mortgage loans vary from lender to lender, however the typical term is between fifteen to thirty years, with payments typically made in monthly installments. Even though most lenders lay down similar criteria to decide each person mortgage loan application, the final decision as to whether to offer the home buyer a loan, how much they area allowed to take out, which interest rates and repayment plans to offer, are all the personal preference of the lender.
Most lenders will look at the subsequent criterion when assessing the suitability of a person to take out a mortgage loan for the amount that they are seeking:
- Individual’s (or couple’s) gross pre-tax yearly income
- Individual personal debts of the person applying for a mortgage
- Relevant credit history
- Value of the mortgage being asked for, including final amount with interest etc.
- Personal references from respectable persons
These criteria will significantly influence whether the lender will accept or reject your mortgage application. However to save you the disappointment of being rejected, especially if you though you would be accepted, you could see if you pre-qualify before going to the bank manager or loan company. To determine whether you pre-qualify for a mortgage, one can utilize a very useful tool in a mortgage calculator. Mortgage calculators can calculate a number of things relating to mortgages. One of the first things that these calculators are useful for is checking if you pre-qualify for a mortgage.
In order to use the pre-qualifying part of a mortgage calculator you need to know the following information beforehand, as the pre-qualifying calculator qualifies you on the proposed mortgage by assessing the loan against your personal income.
- Gross pre-tax income
- Total monthly debts
- The loan amount that you wish to take out
- The amount of interest on the loan
- The number of years over which you want to pay off the loan
If the mortgage calculator has determined that you approve for a mortgage, then the next step would be to see a lender directly. Assuming that you will get a loan is easier if you have checked that you pre-qualify, but again you should not go ahead with any contract signings until the bank or loan company has guaranteed you. During your meeting with the lender, they will make every effort to explain all relevant details of the mortgage to you.
During the interview with the bank or loan company manager the manager will no doubt make every effort to explain the details of the mortgage to you, however when you are discussing the mortgage with the bank or loan manger you should always ask the following questions, or at least be aware of the answers to them, when taking out a mortgage:
- What is the value of mortgage (balance)?
- How much are the mortgage repayments?
- How are the repayments paid: each week/month/year?
- How many repayments will there be?
- When will the repayments be due?
- When will the balance of the mortgage be paid off in full?
- What are the options for repaying the mortgage earlier?
- What is the interest on the mortgage?
- What are the consequences of missing a repayment?
By getting the answers to these questions you’ll have a better idea on what type of mortgage is available to you, and more importantly, whether you’ll be able to afford to dive in such an endeavor. You should always remember that the repayment is not limited to paying off the principal amount but also the following items:
P - Principal amount
I - Interest on the principal amount
T - Property taxes to the government
I - Mortgage insurance
The above items are known as PITI (Principal, Interest, Taxes & Insurance) values and these four factors combine to make up each mortgage repayment installment, which is anywhere from every two weeks to month, until the mortgage is paid off in full. Knowing what the value for each of these factors will give you an exact value in dollars that indicates what you will pay each month. Knowing this value and keeping track of it is vitally important for your financial management schedule, and can be easily quantified with another feature in a mortgage calculator: the PITI calculator.
By inputting the following values regarding your mortgage into a mortgage PITI calculator you can calculate the amount of PITI you will pay each month, which equates to your monthly mortgage repayment installment:
- Number of years the mortgage is to be paid of in
- Interest rate the mortgage attracts each year
- Principal mortgage amount
- Annual government tax on the mortgage
- Annual home insurance on the mortgage
Sample Calculation: You take out a mortgage valued at $150,000, with an interest rate of 8% over 25 years. The annual taxes and insurance will be $1,800 (usually 1.2% of price of home) and $645 (usually 0.43% of price of home) respectively. You will pay the following in PITI per month
Homeowners insurance = $645/12 = $54
Principal & interest = $ 1158
Property taxes = $1800/12 = $150
Monthly PITI payment = $54 + $1158 +150 = $1362