Two mortgage terms everyone should know

I would like to discus two mortgage terms that every one looking to find a mortgage should know amortization and private mortgage insurance (PMI).

Amortization:

Amortization is the process by which your monthly loan payment is determined In an Amortized loan you make periodic or monthly payments.

In an amortized loan the amount of the loan payment is determined by the size of the principal on the mortgage, the type of mortgage, the interest rate on the mortgage, and the number of payments you are too make.

If you have a Fixed Rate Mortgage your payments will be the same over the life of the loan. While if you have an Adjustable Rate Mortgage (ARM) your monthly payments will change with the change in interest rates.

How the loan payment is decided?

When you take out a loan the total amount of money that you borrow is called the principle. This is usually the price of the house minus the down payment. Interest is the amount of money that the bank or lender charges you for the loan. It is a percentage of the principle.

In an amortized loan your monthly payment is the principle divided by the number of payments plus the interest, taxes, and PMI.

Your monthly mortgage payment will first go to paying part of the interest on the loan and then it will go to paying part of the principle. In the beginning of the loan the majority of your loan payment will go to the paying of interest. This will change over the life of the loan. By the time you are half way through the loan your mortgage payment will go equally to interest and principal with each month after having a larger part of the payment going towards the principle.

Private mortgage insurance:

Private mortgage insurance is a great tool for those of us who do not have the typical 20% down payment.

A lender will always want you to put down the largest down payment as possible. In general they are looking to receive 20% of the purchase price of the house. Unfortunately not all of us have the funds for a 20% down payment. In a lot of cases you may only have 10% or as little as 3% for a down payment. This is where Private mortgage insurance comes in.

In a way private mortgage insurance makes up the difference between what you have for a down payment and the 20% the bank is looking for. Lenders allow lower down payments with PMI because Private mortgage insurance will pay the mortgage if you can’t pay or if you go into default on the loan.

Let’s give an example of how PMI works

Let’s say I have $20,000 in the bank for a down payment on a house. If my only option was to put down a %20 down payment I could only afford a house with a maximum value of $100,000. But if I can purchase private mortgage insurance and put down %10 I could afford a house with a maximum value of $200,000. With a %5 down payment my purchasing power goes up to $400,000.

Remember that with lower down payment you have to buy PMI. For a loan of $200,000 and a %10 down payment your payments might be around $80 a month. PMI payments are usually paid as part of your monthly mortgage payment and are placed in escrow until it is time to pay the premium

The cancellation of PMI

The Homeowners Protection Act of 1998 requires that PMI be canceled once the owner has reached %22 equity in there home (based on the original property value) on mortgages signed on or after July 29, 1999. Once you have reached the %20 equity mark you can also request that PMI be canceled

If you signed your mortgage before July 29, 1999 then you may request that PMI be canceled once you have reached the %20 mark but they are not required to do so. There are a few possible exceptions like if you have not kept your payments current; if there liens on the property or you are considered a high risk loan.

You should see what the laws are in your state you might have more protections especially for those who sing before July 29, 1999

Visit Independent Loan Information for more information about basic mortgage terms like Equity, Escrow and closing costs.