Mortgage is a very important consideration in making your home purchase budget.
This will help you determine the price range of homes that you can afford to buy.
If you know the possible amount of mortgage you will be getting, your options would be wider.
In addition, you can be sure of the types of homes that you can get.
There's no fantasizing or dreaming and even what ifs.
When you check out the place that you want, you can speak confidently to the agent or the owner and make a purchase offer.
This is because you know it is within your ability to pay.
Analyzing your mortgage does not only help you in making your home purchase budget.
It also helps you with your monthly budget.
Remember, if you obtain mortgage, you will be paying it off on a monthly basis.
Knowing it beforehand, would help you on how to juggle your finances.
So how do you understand mortgage? All you have to do is learn your P.
I.
T.
I.
P.
I.
T.
I is an acronym used to identify the four main components of mortgage: principal, interest, taxes and insurance.
Let's dissect them one by one so you can understand how it affects your budget.
Principal This is the amount you borrowed from the bank.
It should be paid back depending on the period of your loan.
It could be done within 15 years or 30 years.
However, the yearly payment would be divided to 12 to determine your monthly payment.
Interest The bank earns money from the interest they charge you.
Your interest rates could vary.
It may be fixed or variable.
If it is fixed, interest paid every month is locked with the same amount.
On the other hand, having variable interest rates would mean having varying amounts as rates fluctuate from time to time.
Therefore, it is important for homebuyers to contemplate hard on the type of interest to get; as it could make a difference in the amount you would have to be paying every month.
Taxes Every person who plans to buy a home would be responsible to pay property taxes.
Taxes may be around 2% to 4% of the purchase price and it is paid yearly.
You should realize that this is part of your monthly expenses.
Otherwise, you might end up short all the time.
Insurance This refers to homeowner's insurance.
In some cases, it could mean private mortgage insurance.
Expect every month that a portion of your income will be allotted to these expenses.
It is just like paying rent.
The only difference is your paying to build your own equity not somebody else's.
Taxes and insurance may be paid together with the principal and interest.
The first two will be deposited to an escrow account and when the time it needs to be paid, it will be disbursed to the right parties.
PITI gives you a clear picture of what you can afford.
If you learn to compare different PITIs, you can anticipate the trends of the cost in home purchase.
At the same time, this will keep you prepared for the expenses and prevents occurrence of defaults and late payments.