DEBT RATIOS
From the documents you produce, your Mortgage Broker and ultimately the Lender will calculate your debt ratios and ensure that you meet the criteria for the programs his lending institution offers. See 4 Factors Of Lending.
MORTGAGE PAYMENT
Part of your Mortgage payment is calculated (on a Financial Calculator) by taking the Mortgage amount, the length of Mortgage and the Interest Rate to come up with the Principal and Interest portion, or what the industry calls “PI”. In a typical mortgage, your payment must cover the cost of the mortgage to the lender in the form of Interest. What remains reduces the Principal portion of the Mortgage balance. So in 30 years (or what ever term period you picked) the Mortgage will be paid to zero and you are Mortgage free.
The Lenders typically require you to include additional monthly costs to your payment. They would include (T) for Taxes, (I) for Insurance* and (MI) Mortgage Insurance*. So you may hear the term PITI, which stands for Principal, Interest, Taxes and Insurance. Most forget to tell you about the MI portion, but believe me the Lender will not.
Taxes and Insurance are generally required to be “Escrowed” in a special account so the lender can control when Taxes and Insurances are paid. They start with an initial balance in a non interest bearing account. Then on a monthly basis, add 1/12 of the amount for Taxes and Insurances to the mortgage payment. When the bill is due, they pay the Taxes/Insurance from this account. So if the Taxes are $1,670.76, then they put $139.23 each month for 12 months to pay next year’s $1,670.76 tax bill. If the tax increases, they will increase the amount they take each month to recover the difference. The same process happens for Insurance.
So a typical mortgage payment would be broken down into the following:
Principal - $90.40 Amount Increases over the life of the loan
Interest - $541.67 Amount Decreases over the life of the loan
Taxes (escrowed) - $139.23 Changes when your taxes change
Insurance* (escrowed) - $107.21 Changes when you Insurances change
Mortgage Insurance - $43.33 Pay until you are below 75% Loan-To-Value (LTV)
Total Payment $921.84
* See Insurance for greater detail on Insurance and Mortgage Insurance explanations.
FIXED RATE MORTGAGE
A fixed rate mortgage means the principal and interest rate (PI) portion of your mortgage payments will remain the same for the duration of the loan. Typical periods for Fixed Rate Mortgages are 15, 20, 25, 30 and even 40 years.