Home-Buying Process:
The Mortgage Process
The Mortgage Payment
The conventional monthly mortgage payment includes the principal, interest, taxes and insurance, also known at PITI, if you are required to put your taxes (T) and insurance (I) in an escrow account. Your payment may differ from what was quoted on your Good Faith Estimate or Truth In Lending Disclosure. This can be because what is quoted on these documents does not include taxes and insurance.
PITI:
P = Principal — The amount applied to your loan to lower the outstanding balance.
I = Interest — This is the cost of borrowing money.
T = Taxes — 1/12th of the estimated annual property tax. The amount paid to your local tax office for owning property in a specified county.
I = Insurance — 1/12th of the annual homeowner?s premium. This figure can include flood insurance and mortgage insurance. Mortgage insurance (also known as MI), is there to protect the mortgage holder in case the borrower defaults on the loan. This type of insurance is usually required for government-secured loans or loans in which the amount financed is more than 80 percent of the value of the property.
If the lender requires you to pay the taxes and insurance as part of your monthly payment, an escrow account will be opened to hold this money until the payments are due. Many people consider this convenient because they do not have to make separate payments. In some cases, however, the lender may allow you to pay taxes and insurance separately from your mortgage payment.
References:
American Homeowner Education & Counseling Institute. (2000). Core curriculum: National standards for homeowner educators and housing counselors. Author.
FDIC Money Smart Curriculum. (n.d.). An adult education program - Building knowledge, security, confidence. Author.
Next: Purchasing Homeowners Insurance
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