Mortgage 101

Mortgage images

Mortgage Basics

A mortgage is a loan you obtain to pay for a home and any land it sits on. The home and land is used for collateral on the loan, which means that if you don't make your payments, the lender can take the home away to cover your missed payments.

The loan principal is the amount you actually borrow to purchase the home.

Interest is the amount the bank charges you to use their money; it is a percentage based on current economic indicators.

Because the loan is for such a high amount, it is usually financed for between fifteen and thirty years. The amount of time is called the loan's term. Principal and interest together comprise most of your payment.

The total is then divided into equal payments over the life of the loan using a process called amortization. With amortization your payments mostly go toward interest early in the loan and then more goes toward the principal later in the life of the loan.

For example, if you borrow $100,000 dollars with a 30-year loan at 7% interest, amortization will calculate your payments something like this:

Payment

Amount

Interest

Principal

Balance

First Payment

$665

$583

$82

$99,918

At 5 Years

$665

$550

$115

$94,132

At 10 Years

$665

$501

$164

$85,812

At 20 Years

$665

$336

$329

$57,300

Last Payment

$665

$4

$661

$0

In this example, after thirty years you would have paid off the $100,000 you originally borrowed, but you also would have paid an additional $139,509 in interest.

Your total payment is more than just the principal and interest. The acronym PITI can help you remember all the parts of your payment. It stands for principal, interest, taxes, and insurance.

If you put less than twenty percent down on the loan, the bank considers it a little riskier and requires an escrow account. They pay your annual insurance and taxes from this account and collect money monthly to gather the required amounts.

If you have less than twenty percent down, your lender will probably also require you to include an amount for private mortgage insurance (PMI) in your payment. These are then added to the required principal and interest amounts to total your monthly payment.


Your Credit

 

Let's take on the fundamentals of the credit reporting system. From the big three credit bureaus, TransUnion, Equifax and Experian, to your rights under the Fair Credit Reporting Act, this article will help you navigate the credit report maze.

 
The credit reporting agencies – TransUnion, Equifax and Experian are the three national credit reporting agencies that keep records on consumers. The reporting agencies work with lenders, creditors, insurers and employers to update and distribute your information to the appropriate institutions. Here's an example of how the system works:
 
  1. When you apply for a new credit card the creditor requests a copy of your financial history from the reporting agencies. This causes a “hard inquiry” to be recorded on your credit report.
  2. The creditor uses your credit reports and scores along with income and debt information to determine what rates to offer.
  3. You start to use the new credit card and the creditor reports your activities to the credit reporting agencies about every 30 days.
  4. The credit reporting agencies update your credit report as they receive new information from creditors or lenders.
  5. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.
 
Your credit report – Your credit report is divided into six main sections: consumer information (address, birthday and employment), consumer statement, account histories, public records, inquiries and creditor contacts. When you open a new account, miss a payment or move, these sections are updated with new information. Old negative records will stay on your credit report for 7-10 years. Positive records can remain on your credit report longer. Not all creditors report to all three agencies and the agencies obtain their data independently so your reports from TransUnion, Equifax and Experian could be substantially different from each other. That's why it's important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.
 
Correcting inaccuracies – Under the Fair Credit Reporting Act, consumers are protected from having inaccurate information on their credit reports. If you find an inaccurate record on your report, try contacting the creditor or lender associated with the mark first. These companies can usually correct the mistake and send an update to the credit reporting agencies. If you can't make progress this way, you can also dispute the inaccuracy directly with the credit reporting agencies.
 
Working the system – Keeping your credit reports healthy will improve your credit scores and help get you the best rates on major purchases. We recommend that you check your credit reports every 6-12 months or at least 3 months before a major purchase in order to guard against damaging inaccuracies and identity theft. Routine check-ups along with paying your bills on time, keeping your credit card balances below 35% of their limits and correcting any negative inaccuracies will help you maintain a healthy credit profile.


Apply for a Mortgage