See Real estate terms

What's In A Price?

When it comes to buying a home, you need to focus primarily on what makes up each monthly payment. Simply put, it's called PITI, which stands for principal, interest, taxes and insurance. To determine your average monthly payment, lenders suggest devoting no more than 28 percent of your gross income to PITI. Of course, how much home you can afford depends greatly on other factors as well: your income, credit, savings and financing, to name a few variables.

Getting a Down Payment

Often, coming up with the down payment is the single biggest hurdle new homebuyers face. That's why, today, many first-time buyers don't put down 20 percent (the traditional amount); 10 percent down payments are more like it; and even 5 percent down payment programs are available. Of course, by putting more money down initially, your outstanding home loan and monthly payments shrink. Besides having cash reserves to put down on a home, you also need to consider closing costs. These expenses include, among other things, title insurance and escrow fees, loan origination fees or points (one point equals 1 percent of the loan amount), prorated interest on the loan and prorated property taxes, local taxes, appraisal and credit report fees, and hazard insurance.

Types of Mortgages

Mortgage loans come in a variety of shapes and sizes, including conventional, federal and state financing programs. Besides fixed versus adjustable interest rates, one of the most important factors in choosing a loan is the term of the mortgage. Thirty-year mortgages have long been the industry standard, but with interest rates as low as they are these days, more buyers are opting for 15-year and even 10-year mortgages. While the payments on these loans are higher that they would be on a 30-year mortgage, and qualifying for these loans is understandably more difficult, the total interest savings over the life of the loan are considerable. For instance, on a $160,000, 30-year mortgage at 7.2 percent, you would pay $231, 040 in interest over the life of the loan. On a 15-year loan at 6.7 percent, you would pay only $94,110 in interest over the life of the loan.

Besides 10 and 15-year loans, shorter-term balloon mortgages also have come into vogue recently. Examples of these are 30-due-in-5 and 30-due-in-7 mortgages. These loans have payments based on a 30-year amortization schedule, but they are due in either five or seven years. These balloon payment loans have lower interest rates and smaller payments that standard 30-year fixed mortgages.

Financing Information

The terms of your mortgage loan are very important to your ability to make the monthly payments and meet all your other obligations. Under a standard conventional mortgage loan program, a lender will loan you up to 80 percent of your home's purchase price. In order to be approved for a conventional mortgage, your housing costs must total no more than about 28 percent of your gross income, and your total debt must equal no more than about 36 percent of your gross income. You will also need savings equal to two or three months of housing expenses.

Private Mortgage Insurance (PMI) allows you to purchase a home with as little as 5 percent down. This insurance is paid for by you and insures the lender for any losses incurred due to your default. The major PMI companies recently introduced a new payment structure, which eliminates the up-front payment of the first year's premium by charging a slightly higher monthly fee over the term of the insurance.

In addition to private mortgage insurance, the federal government offers two low-down payment mortgage financing options; the FHA Mortgage Insurance Program, the VA Home Loan Guarantee Program. Loan programs through the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are other saving options--your REALTOR has more details.

Rates

For daily rates and mortgage news, see www.interest.com.

Real Estate Terms

Adjustable-Rate Mortgage (ARM): A loan on which the monthly payments will increase or decrease over time, based on changes in the ARM's interest rate index. ARM payments typically are adjusted every six months or once a year. Common indices to which ARMs are tied include the 11th District Cost of Funds, one-year T-note and six-month T-bill.

Amortization: The gradual repayment of a mortgage through monthly (e.g., installment) payments. In the early years of a mortgage, most of the monthly payment goes toward interest. Later in the mortgage, more of the payment goes toward reducing the loan's principal balance.

Annual Percentage Rate (APR): The annual cost of a mortgage, including interest, loan fees and other costs, stated as a percentage of the loan amount.

Appraisal/Appraised Value: An opinion of the market value of a home expressed by a real estate appraiser.

Arbitration: The term used to describe a form of dispute resolution that occurs outside of the court system. Basically, arbitration is a dispute resolution system where the parties submit arguments and evidence to a neutral person, know as the arbitrator, who then renders a decision, called an award, based upon the evidence and arguments presented.

Caps: Provisions of an ARM limiting how much the interest rate can change at each adjustment period (e.g., every six months, once a year) or over the life of the loan (rate cap). A payment cap limits how much the payment due on the loan can increase or decrease.

Closing: The meeting at which a home sale is finalized. The buyer signs the mortgage, pays closing costs and receives title to the home. The seller pays closing costs and receives the net proceeds from the home sale.

Closing Costs: Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.

Conventional Mortgage: A loan not guaranteed, insured or made by the federal or state government.

Debt-to-Income (DTI) Ratio: The ratio of monthly debt payments to monthly gross income. Lenders use a housing DTI ratio (house payment divided by monthly income) and a total DTI ratio (total debt payments including the house payment divided by monthly income) to determine whether a borrower's income qualifies him or her for a mortgage.

Deed: A legal document conveying ownership of property.

Downpayment: The portion of the home's purchase price the buyer pays in cash.

Earnest Money: The deposit given by a buyer to a seller to show that the buyer is serious about purchasing the home. Earnest money usually is refundable to homebuyers in the event a contingency of the sales contract cannot be met.

Equity: The difference between a home's value and the mortgage amount owed on the home.

Escrow: The holding of documents and money by a neutral third party prior to closing.

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation): Government-sponsored, privately owned entities which purchase mortgages from lenders and turn the mortgages into securities which are bought by investors. Fannie Mae and Freddie Mac are the key secondary mortgage market agencies.

Fixed-Rate Mortgage (FRM): A loan on which the interest rate and monthly payment do not change.

Hazard Insurance: A policy which protects against the damage to a property caused by fire, wind or other hazards.

Homeowner's Warranty: A policy that covers certain repairs (e.g., plumbing or heating) of a newly purchased home for a certain period of time.

Impound Account: An account established by a lender to collect a borrower's property tax and insurance payments. Impound accounts are normally required on mortgages with down payments of 10 percent or less.

Loan-To-Value (LTV) Ratio: The ratio of the amount of money owed on a home to the home's value. The LTV ratio for a $100,000 home financed with a $90,000 mortgage would be 90 percent, for example.

Mediation: A process used to resolve disputes. In mediation, the parties to the dispute are assisted by a neutral third person called a mediator. The mediator is not empowered to impose a settlement or decision on the parties, rather the mediator facilitates discussions and negotiation between the parties with the goal of assisting the parties in reaching a mutually acceptable settlement of their dispute.

Mortgage Banker: A company which originates mortgages for sale into the secondary mortgage market (e.g., to Fannie Mae and Freddie Mac).

Mortgage Broker: An individual or company that arranges mortgage financing between a borrower and a lender.

Mortgage Interest Deduction: The ability of mortgage borrowers to deduct the interest paid on a home loan for purposes of federal and state income taxes.

Origination Fee: A fee charged by a lender for making a mortgage.

PITI: Principal, interest, taxes and insurance -- the primary components of a monthly mortgage payment.

Points: One point equals 1 percent of the mortgage amount. Points are charged by lenders to increase the lender's return on the mortgage. Typically, lenders may charge anywhere from zero to two points. Loan points are tax deductible.

Principal: The loan amount borrowed or still owed.

Private Mortgage Insurance (PMI): Insurance issued by private insurers which protects lenders against a loss if a borrower defaults on a mortgage with a low downpayment (e.g., less than 20 percent).

REALTOR: A real estate broker or agent who, as a member of a local Board/Association of REALTORS, a state association of REALTORS and the NATIONAL ASSOCIATION OF REALTORS, adheres to high standards of professionalism and a strict code of ethics.

Seller Financing: A financing agreement in which a seller provides part (or all) of the financing needed by a buyer to purchase the seller's home.

Title: A legal document establishing the right of ownership of a property.

Title Insurance: Insurance to protect the buyer and lender against losses arising from disputes over the ownership of a property.

Underwriting: The process of evaluating a loan application to determine if it meets the lender's standards.