There are two basic components that make up every mortgage payment - principal and interest. However, many homebuyers are unaware of the differences in both terms, and sometimes use them interchangeably.
Understanding both principal and interest can help you choose the best mortgage option for you.
In this article, we’ll share everything you need to know about principal and interest. We’ll cover the differences between the two and help you determine what you owe, or will pay, on your mortgage.
The initial loan amount you took out to purchase your house is known as the mortgage principal.
It isn't the price you bought for your house or the sum of your regular mortgage payment.
For example, you purchase a home for $450,000 with a 20% down payment. This suggests a $90,000 down payment on your loan. Your mortgage lender would then cover the cost of the remaining amount on the loan, which is $360,000. In this case, your principal balance is $360,000.
When you make a payment each month, a portion goes toward the principal balance of the loan, a portion goes toward the interest payment.
The main balance of your mortgage will fluctuate over the course of your loan as you pay it off with your regular monthly payment and any additional payments. While you reduce your mortgage's principal, your equity will rise.
The fee for borrowing the principal amount of a mortgage is known as mortgage interest.
Both are covered by your monthly mortgage payment, though you probably won't get a breakdown of how much of it is made up of principal and how much is interest.
Most lenders calculate and determine your mortgage rate in terms of an annual percentage rate (APR).
This is the actual amount of interest that you pay on your loan per year (APR includes your mortgage rate and fees/costs). Using our example, if you borrow $360,000 at an APR of 5%, you’d pay a total of $23,190.72 annually in interest.
Bear in mind that just a few percentage points of interest can make a huge difference in how much you eventually end up paying for your loan.
Using our example, let’s say you borrow $360,000 at a 4% interest on a 30-year loan. With this loan, your annual payment would come to $20,624.
The interest rate on your loan depends upon a number of factors.
These can all influence how much you pay in interest:
So having knowledge of how these factors affect your interest rate can help you negotiate for lower rates when applying for mortgage.
Your monthly payment isn’t just made up of principal and interest. lenders typically include principal, interest, taxes and insurance (PITI) when determining how much house they will approve you for.
Taxes are among the most expensive and sometimes disregarded expenses of house ownership.
Your local government receives funding from property taxes for services like public schools, roads, fire departments, and libraries.
The value of your house and the local amenities that your neighborhood provides determine how much you pay in taxes.
Getting an appraisal when you purchase a house is necessary in part so that your local government can accurately determine your taxes. Taxes might change year to year, and depending on your county, you might need to acquire an updated appraisal every few years.
Property will be valued by tax assessors, who will then impose the appropriate rate on homeowners in accordance with tax authority guidelines. They determine that value by either utilizing the mill levy or the assessed value of the property (which is based on local real estate market conditions).
Though you are not required to have homeowners insurance to own a home, most lenders refuse to give loans without insurance.
With homeowner's insurance, you're protected against damage from things like lightning, fires, and break-ins, to mention a few. You may need an additional policy to protect yourself from damage caused by flooding and earthquakes.
Your homeowners insurance depends on a number of factors such as location, value, proximity to fire station or police station. Additional risk factors such as age of home or owning a swimming pool can also impact insurance costs.
Your monthly mortgage payment may be deducted by your mortgage lender as part of an escrow account.
What you owe in real estate taxes and insurance premiums is kept in an escrow account. To make sure you pay your insurance and tax obligations on time, lenders gather this money and make the payments on your behalf.
Your property tax and insurance rates will determine the exact amount you pay in escrow. When your taxes or insurance changes, your lender may reassess your escrow payments.
In most mortgage contracts, your monthly mortgage payment will remain constant until the debt is repaid.
However, if you pick an adjustable-rate mortgage (ARM) or make extra loan payments, there are two situations where your monthly payment (or the number of years you have to pay your mortgage) could change.
With an ARM, your interest rate will fluctuate in line with market rates.
With an ARM, you typically get a few years of cheap fixed interest rates. When that promotional period expires, your prices will vary in accordance with the market. Your rate increases if market rates do and vice versa.
Due to the fact that your interest rate can change, this could alter your monthly mortgage payment. The introductory rate is lower than the normal fixed-rate mortgage, which has an interest rate that stays the same for the duration of the loan.
If you pay off more of your loan than you originally planned to, your mortgage payment may alter.
This is so that interest is only charged on the amount you actually owe. At the start of your loan, interest makes up the majority of your monthly payment.
Your main balance and the amount of interest you owe will gradually decrease as a result of the monthly payment you make.
This procedure, known as "mortgage amortization," gradually lowers your principal balance and the amount of interest you owe.
Paying just a little bit more each month toward your principal can help you save a significant amount of money. Say, for illustration, that you have a $360,000 loan with a 30-year term and a 4% interest rate. Your mortgage payment each month would be $1,719.
You could save $30,171 in interest over the course of your loan if you paid an extra $100 a month. Additionally, by making the extra payments, you would pay off your loan 2 years sooner than you otherwise would.
You can think about budgeting some extra cash each month to reduce your principal balance with an additional principal payment. Make sure to inform your lender that the additional payment should only be applied to the principal.
Examining your monthly mortgage statements is the simplest way to stay on top of your mortgage's principal and interest.
You'll receive a statement from the mortgage servicer that details how much you paid each month toward the principal as well as how much was deducted from it. The numbers are available in your online account, if you have one.
Understanding the ins and outs of principal, interest, and amortization schedules for a mortgage can be a very useful tool for speeding up principal repayment and reducing interest costs.
One of the largest and most common debts people have is their home’s mortgage. Most people need a mortgage to be able to afford a home. Unfortunately, it can take many years to save the full amount of a home, and most people need a home now.
While you can follow the traditional 30-year mortgage payment, there are ways that you can pay off your mortgage faster with these seven strategies.
Most mortgage payments are monthly, so you will make 12 monthly payments towards your mortgage in a year.
If you switch to bi-weekly payments, you will end up paying 13 monthly payments (one extra payment a year). While this might not seem like a lot, it really can save on the interest you pay and help you pay off your mortgage faster.
For example, your monthly mortgage payments are $1,000.
This $1,000 extra towards your mortgage can save you over $25,000 on interest and shave 4.5 years off your mortgage.
If your financial goal is to pay off your mortgage faster than your payment plan, one of the best ways to do this is through budgeting for extra payments. The next tip will explain where you put those payments, but this tip is to explain how you can budget for this extra payment.
As you track your spending and create a budget, make a line in your budget for extra payments towards your budget. Then, see where you can cut back your spending. You can make a plan to pay extra every month or make a lump sum after a year of saving.
This is up to you and how you want to put those extra payments toward your mortgage.
When you want to make extra payments on your mortgage, make sure they are going to the principal amount that you borrowed.
Putting your extra payments towards the principal will help reduce your mortgage term and total interest paid. As a result, you could shave off years on your mortgage and save a huge amount in interest. Make sure to call your mortgage provider to discuss how to make additional payments on your mortgage.
Another way to pay off your mortgage is to refinance your mortgage to a lower interest rate.
You may have had a higher interest rate for your mortgage depending on when you bought your home or your credit score. If the rates are lower now than when you bought your house, you can refinance to a lower rate, reducing your monthly payments.
The money you will save with lower monthly payments can be put toward your loans as extra principal payments.
A typical mortgage is a 30-year mortgage.
This will give you the lowest monthly payments, but you’ll pay the most interest. You can refinance to a 20 or 15-year mortgage. You’ll pay more monthly payments but significantly less on interest and have a mortgage for less time.
Depending on your rate, you could be saving $50,000 or more if you have a loan for a $250,000 mortgage.
If you currently have a 30-year mortgage, you can switch to a 15-year mortgage, and you could get a lower interest rate as well.
However, keep in mind that when you refinance your mortgage, there will be closing costs which could be a few thousand dollars to pay.
Recasting may be a good option if you have a lump sum payment and want to reduce your loan term, but keep your current rate.
When you recast your mortgage, you are putting a large sum towards the mortgage, and your bank will re-adjust your payoff schedule with that new balance. This can help make your term shorter.
The cost of recasting your mortgage is only a few hundred dollars, and you get to keep your current interest rate. This is beneficial if you have a lower rate. If you have a higher rate, it may be better to refinance, but look into the cost of doing this and what will be the best for you.
If you recently inherited a large sum of money or saved up for a year to put that money into your mortgage, consider making a lump sum payment towards your loan.
You may be able to put this amount into the principal payment. If you can’t, the money will be evenly split between the interest and principal. This can help you save years off your mortgage and save on the interest you’d have to pay (especially if it can all go towards the principal balance).
A mortgage doesn’t have to be a debt that you have had for 30 years.
While this is normal, there are easy ways to help you reduce the length of time that you will have to pay off your mortgage faster with extra payments or refinancing. Any extra money that you can put towards your mortgage will reduce the time you have your mortgage and save you money over time.
How much cash a prospective homeowner will need to save and spend to get a mortgage is a common concern.
The biggest challenge for first-time home buyers is saving for a down payment as it can take years to save up the lump cash. Lenders require a down payment because it is assumed that the buyer would be less inclined to default because of the upfront payment.
But did you know that you don't have to need a down payment to purchase a home?
A zero-down mortgage payment allows you to purchase a property without depositing your money. In this article, we'll explore various ways you can achieve your dream of owning a home without having to make a down payment.
As the name implies, a zero-down mortgage is a home loan that allows you to purchase a home without a down payment. Lenders usually calculate your down payment as a percentage of the total amount you borrow.
For example, if the home you intend to buy costs $400,000 and the lender requires you to make a 20% down payment, this means you would have to bring $80,000 to close the deal. However, with a zero-down payment mortgage, you wouldn't need to make any type of upfront payment.
So you may ask, what's in it for the lender since you would not be committing your money?
Isn't the lender taking a big risk by offering you a house without any form of financial commitment?
Not exactly. Zero-down mortgages are usually backed by the government. As such, the lender does not take all the risk in the case of a default.
This absence of risk encourages the lender to provide you with more favorable loan terms.
However, some lenders offer this type of loan without government backing. This would be examined in detail below. First, let's check out the options for a mortgage with no down payment that is backed by the government.
VA loans are provided by private lenders such as banks, credit unions, and mortgage finance companies. These loans don’t require down payments as long as the sales price is at or below the home’s appraised value.
VA loans are usually guaranteed which means that the Department of Veteran Affairs will reimburse the lender in the event of loss due to foreclosure.
As the name suggests, this loan is not open to everyone. To be eligible for a VA loan, you must be a veteran, active-duty service member, member of the National Guard, reserve, or the surviving spouse of a veteran.
Other requirements vary based on whether you’re on active duty or a former member of the military if you served or are serving in the National Guard or Reserve, and when you served.
VA loans usually have no or low down payment requirements, and lower interest rates than traditional mortgage products. These loans also tend to be more flexible, allowing for a higher debt-to-income (DTI) ratio and lower credit scores, and don’t require private mortgage insurance (PMI).
VA loans also allow you to pay a one-time VA funding fee that’s 2.3% of your loan value instead of mortgage insurance. For each subsequent use of a VA loan, the funding fee with no down payment is 3.6%.
Lenders may also have additional eligibility requirements such as a minimum credit score. For more detailed information on the requirements for a VA loan, check here.
The U.S. Department of Agriculture (USDA) provides homeownership opportunities to low-and moderate-income Americans to live in rural or suburban areas through several loans, grants, and loan guarantee programs.
Loans may be provided directly through USDA, though most are made available as mortgages provided by traditional lenders such as banks with the guarantee of USDA. This scheme which has been in existence since 2007.
There are three types of USDA loans for homebuyers:
Guaranteed USDA Loan
Under this loan scheme, USDA offers guaranteed loans through local lenders. This implies that in the event of default, USDA bears the risk. These types of loans typically suit low- or moderate-income borrowers with low credit scores.
Household income generally includes the combined income of the loan applicant and every adult in the household, regardless if their names are on the loan application.
Direct USDA Loan
In this type of loan scheme, the USDA funds the borrowers directly rather than through traditional lenders. Direct USDA loans are favorable for low-income and very-low-income Americans who can’t access traditional mortgage financing.
USDA Home Improvement Loans
These loans help low-income Americans repair or enhance their homes. Depending on your circumstances, USDA may combine these with grants you don’t have to pay back.
Neither of these home loan programs requires a down payment, but you must live or plan to live in an eligible rural area to qualify. See a list of eligible areas here.
In addition to buying a home in an eligible location, borrowers need to meet other requirements which include:
Private lenders also offer zero-down payment loans. However, the housing market crash of 2008 has reduced the prevalence of these loans. So it may be difficult getting zero-down payment loans from private lenders in comparison to government-backed loans.
In addition, private lenders require a higher credit score than those required for government-backed loans.
Some examples of lenders who offer loans with no down payment include North American Savings Bank (NASB) and Navy Federal Credit Union. If you’re exploring this option, be sure to contact the lender directly to learn more details about their offerings before applying.
Obtaining a home loan without a down payment may seem like a good deal, but it could also come with some disadvantages. Let's have a look at the pros and cons of zero-down payment loans.
You don't need to wait until you have enough cash saved for a down payment. This saves you time and money, plus frees you from the mental stress that comes with trying to meet up with the down payment.
Borrowers don't have to worry about paying mortgage insurance in addition to your loan payments.
If it's a government-backed loan, borrowers with low credit scores can be eligible. Plus the lender can give better conditions since the risk of loss through default is lower.
If the loan is not backed by a government entity, then it will likely come with a higher interest rate
The lender will typically charge higher origination and funding fees
You typically need a good credit score to be eligible if the loan is not government-backed.
Struggling with your mortgage payments? Could you use some mortgage help?
Tough times can come in many forms. Job loss, medical bills, or any kind of unexpected event can throw off your regular financial routines. But when you hit tough times, the first problem is balancing the money you still have with all your financial responsibilities.
In general, there is usually hope. Mortgage rates today are high, and sometimes young people need to work out arrangements with their lenders. But mortgage challenges can pop up at any time, to people of any age group.
The bank will not foreclose on your house the first time you miss a payment. In fact, you likely have more options and more time than you realize.
In this article, we’re going to cover the ins and outs of dealing with a mortgage when you’re going through a financial rough patch.
While missing a mortgage payment is never a good thing, it can happen to anyone.
In general, yes, you can miss a mortgage payment without suffering serious negative consequences. However, falling delinquent and missing mortgage payments repeatedly can lead to serious consequences, especially if you don’t communicate with your lender.
More than 2 months of delinquency without discussing the situation with your lender can possibly lead to foreclosure. That would leave you with very bad credit and no home.
In general, missing a month or two of mortgage repayments will have some mix of the following consequences:
Again, it’s always best to talk with your lender if you are experiencing (or expect to experience) any difficulty repaying. This can help you avoid worse consequences, and they can offer you alternatives that help you avoid these consequences altogether.
One great place to start looking for mortgage help is from your lender.
If you’re struggling to pay, it can help to talk to them. In fact, if you suspect you’re soon going to have trouble with mortgage repayments, it’s even more useful to reach out. They may be even more willing to help you if you give them some notice.
In general, foreclosure is a very costly process. That goes for both parties; it’s in your lender’s interest to come to a reasonable arrangement that can help you avoid foreclosure. Remember that if you feel shy about talking to them.
Most lenders will be open to working out some options with you to help you get back on your feet. After all, that means helping you find a way to continue giving them a profit for the money they lent you.
There are a few options that can be worked out when you need mortgage help.
Repayment plans enable you to spread out your repayments. The amount of debt you accrue in missed payments is spread out over an agreed-upon period, then added to your regular monthly payments.
This is a good option if you’ve faced a sudden challenge such as losing your job but have now fixed it. It’s particularly useful if you had to switch jobs and there was a delay in getting your first paycheck.
Lenders often offer temporary relief in the form of either reinstatement or forbearance.
What this means is that your lender may agree to temporarily cancel or reduce your mortgage payments. However, they will of course expect you to catch up on your missed payments. This usually means a lump-sum payment by an agreed-upon time.
This is a good option if you have some way of being certain you will be able to pay the lender by the agreed-upon time.
Some lenders may agree to make slight modifications to your mortgage contract.
One example would be an extension of your mortgage term. In that case, you would make smaller monthly repayments, but you would have to repay your mortgage over a longer period. It would also mean paying more in interest over the course of the mortgage.
Of course, refinancing is another available solution most of the time.
You can also refinance a delinquent mortgage. Of course, if you’re just a month behind on mortgage repayments, that shouldn’t present an issue.
The refinancing process means you are paying off your first mortgage with a new one. It’s a sort of fresh start, so being behind on your first mortgage shouldn’t be a huge problem.
Missing mortgage payments isn’t good. But it’s not the end of the world if you deal with the problem early on.
The first thing to do is to reach out to your lender. They will likely be willing to help you, and doing so reduces the risk of serious negative consequences.
Most of the mortgage help solutions come from your lender. However, in some cases, refinancing will be a practical solution.
Mortgage lenders can help you land your dream home or get the starter home you need right now.
But to get the most out of the mortgage industry, you’ll want to pick the right lender. Building a list of potential lenders is just the start. After that, you need to ask some questions to ensure you’re trusting the right person with one of the biggest loans you will take in your life.
In this article, we will go over:
These are the questions to ask your mortgage lender. Of course, where appropriate, if you can verify the answers (with absolute certainty) to any of these questions without asking them directly, then that’s fine too.
When you add these questions all up, you gain a complete picture of who you’re dealing with and what they’re offering. More specifically, you will understand:
You need to know that mortgage lenders you’re considering follow the regulations established by the federal government. The mortgage industry is regulated by a large collection of acts passed by Congress.
Lenders are also not allowed to discriminate or lie to consumers, among other things.
In the US, mortgage companies are regulated by many federal agencies. It’s a particularly confusing situation, relative to many other countries’ mortgage regulations. But mortgage lenders are required to follow a large collection of laws and regulations.
In the US, the Consumer Financial Protection Bureau (CFPB) enforces mortgage regulations. In the case of FHA loans, the Department of Housing and Urban Development oversees these programs.
We highly recommend referring to Regulation Z (The Truth in Lending Act) to arm yourself with the information you need to know about:
Using a mortgage advisor or broker to source your mortgage and arrange for it can make sense.
Their professional knowledge and skillset can help you navigate the marketplace and secure the best possible mortgage for you. But before you go ahead and trust them, there are a few things you should make sure of.
It’s a good idea to stick with brokers certified by the National Association of Mortgage Brokers, which collaborates with similar organizations internationally to promote with collaborators in the International Mortgage Brokers Federation.
This organization provides education and certification to brokers while promoting ethical and professional behavior from its members.
While mortgage lenders are the ones who must follow relevant regulations, some things are also required of you.
First and foremost, you should never say anything untruthful. First, lying can destroy your chances of getting approved, second, lying on your mortgage application is a felony.
Beyond that, we can only recommend that you don’t say anything silly that would ruin your chances of approval. Specifically, don’t joke around or ask questions in a way that makes you appear unreliable.
During your application, you will divulge a lot of information that the lender will use to determine whether they should approve you or not.
When dealing with mortgage lenders, you want to make sure you understand those important points we covered above:
In addition, you want to make sure the loan originator/loan officer is registered under the Nationwide Multi-State Licensing System and Registry so they can legally originate the loan.
By going over the list of 26 questions above, you can have this information answered for.