Mortgage Payments

A clear understanding of mortgage payments and refinancing methods is important to the life of a loan and the lender’s and borrower’s relationship. The basic life of a loan is made up of monthly mortgage payments and each payment can be broken up into four parts, known as PITI: Principal, Interest, Taxes, and Insurance. The monthly payment of principal is applied directly towards repaying the loan itself. The interest pays any accumulated interest against the loan. Taxes, as well as insurance, go into an escrow account. This covers the cost of these items as they become due. All four parts of a monthly mortgage payment are designed to cover all aspects of the loan, simply broken up for simple and easy installments so that no one aspect of the PITI is overlooked or due at one time.

There are exceptions to the PITI, such as the interest-only loan. In this case, only interest is being paid and not principal. The balance of the note is not being paid in this instance. One thing every buyer must consider in regards to making payments is called negative amortization. This begins to happen when the principal balance begins to grow rather than shrink. Negative amortization can begin when interest rates begin to go up on an adjustable rate mortgage and only the minimum monthly payment is being made. Basically, the amount of the mortgage will increase if the payment is not covering the owed interest, which results in the unpaid interest being added directly to the principal balance and thus creating a growing debt. It is in the borrower’s best interest to pay more on each monthly mortgage payment to avoid this disaster from beginning.

When economic times allow, interest rates become favorable and many homeowners take advantage by refinancing their mortgage and saving a large sum of money over time. This is a trend that is hugely popular and offers a source of credit for uses such as rebuilding credit, funding large expenses such as college tuition, debt consolidation, or simply for building leverage. Many homeowners will take advantage of refinancing their mortgage rather than taking out a home equity loan because they can secure a lower interest rate than they might have previously held and end up paying less over the lifetime of the loan. For example, if a homeowner owes $85,000 on the current loan at 4.5%, they might be able to borrow $125,000 on a refinance with a rate of 3.9%. They can use the difference for a major expense and lock in a much lower interest rate in the same deal, saving money over time. As always, when venturing out to find a lender, either for an first mortgage or a refinance, it is always best to seek out rates from up to four lending companies to ensure the best rate possible. If a homeowner with a current mortgage is seeking a possible refinance, they should get quotes from three other lenders before going back to their first lender and seeing if they can beat those rates. The original lender already has the business from the first deal and is less likely to offer a competitive rate unless presented first with offers from others who may essentially “steal away” their current client.

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