Tamara Bodrick: Hi! I am Tamara with Wells Fargo. Today we're discussing the mortgage basics you should know to help you make informed home financing decisions.
For instance, did you know that if you use a mortgage to help you buy a home, you will repay more than the loan amount you borrow? How much you repay is determined by several factors. The interest rate is the percentage of your loan amount a lender charges you to borrow money to buy your home.
Interest rates are based on current market conditions, your credit score, down payment, and the type of mortgage you choose. Discount points are charges you or the home seller may choose to pay the lender, usually at closing, to reduce the interest rates; one point is equal to 1% of the principal amount of the mortgage.
If you qualify you maybe able to pay one or more points to lower your interest rate. A lower interest rate means more monthly mortgage payments. The origination charge includes fees charged by the lender, other than discount points, for items such as: Underwriting, Loan Processing and Other expenses.
If you qualify you may be able to finance the origination charge as part of your mortgage amount. In addition to the origination charge are fees charged by third parties, such as a credit report fee, appraisal fee and county fees. Your loan term is the amount of time you have to pay off your mortgage balance.
Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates, so you may pay less and total interest than with a longer mortgage term. Remember that interest rates only tell part of the story. The total cost of mortgage includes the interest rate plus discount points, the origination charge and third-party fee. Many of these fees are included in the Annual Percentage Rate or APR which is typically higher than the interest rate.
The APR enables you to compare mortgages of the same dollar amount by considering their total annual costs. Now about your mortgage payment is typically made up of four parts. Principle is the amount of money you borrow. Interest is the cost of borrowing the money. Taxes are the property taxes charged by your local government; typically your mortgage servicer collects a portion of these taxes in every mortgage payment and holds the funds in an escrow account to make tax payments on your behalf as they become due.
Insurance refers to homeowners or hazard insurance that provides protection against property damage due to wind, fire or other risk. Like taxes, insurance costs are typically collected and paid by your mortgage servicer from an escrow account. Depending upon your property location, property type and loan amount, you may have to pay a monthly or annual expenses such as mortgage insurance, flood insurance and homeowners association fees.
The more you know about mortgages going in, the better you'll be able to make informed decisions as you go through the process of getting one.