The American Dream Series
First Time Home ownership! Part 3.
You’ve found the lender you are ready to use for your home buying journey. Let’s take a quick break from our walkthrough of the home buying process, and look at what all those numbers mean on loan docs before you sign your life away! Here we will touch on the main points of your monthly payment, and what each means.
Current Principal
The primary number you will see once you begin your mortgage is the Current Principal Balance. This is the total amount you owe the bank on your loan. Let’s use an example and make the math easy.
You want to purchase a home that cost $500,000, and you plan on putting down 10%. After you close and put your $50,000 payment down, your Current Principal will be $450,000. This is the amount you will slowly pay back over your 15 to 30 loan period.
Interest Rate
The next number, and probably THE most important number as you shop, is the Interest Rate. This is the number that has recently made headlines, and what keeps some from taking the step into home ownership. The Interest Rate is the amount a lender charges to borrow the money as a percentage of the Principal. An Interest Rate is generally set as an Annual Percentage Rate or APR, meaning you pay 1/12 of the interest owed in a year per month. While rates were at historic lows the last few years, in recent months we have experienced significant increases in rates as the Federal Government works to slow the economy. Interest Rates are one of the most significant things that will directly affect what your monthly payment will be.
Escrow
As you look at what your monthly payment breakdown would be, you will see it broken into a few different areas. Discussed above, Principal & Interest, are typically the 2 biggest items on your monthly payment breakdown. Additionally, you will see a line for Escrow. Should you ever be foreclosed on, or stop making payments on your loans, the only organization with a higher standing for you owing money to than the bank is our good ole’ friends at the County. Any unpaid taxes will be quickly deducted from any sale of the home. To ensure this is never the case, and that their interest in the property is always protected, the lender will collect a portion of the total property taxes each month, until they take this amount and pay off your property taxes each year. While this seems like a large additional charge, like death, taxes are inevitable so they have to be paid. The good this is, as long as you have your loan, the lender pays these for you! But just remember, as soon as you pay your mortgage off, hopefully early, the lender stops paying these, so don’t forget!
The 3 items discussed above culminate into what you will pay each month. You will receive a payoff schedule, describing how much of each payment goes towards paying down your Principal. My advice, don’t look at this. It can be daunting seeing what you end up actually paying for the home, if you pay all the interest owed over the full 30 years. Just put your head down, set up auto-payments, and let it work on its own. As you slowly increase our income, toss a few bucks towards the principal every now and then. The faster you pay down that, the less Interest you pay overall. And take a breather, you have now just invested in one of the most lucrative markets in the US, well on your way to building your financial future!