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Financial Education

Your Own Home

Mortgage Terms

There are four components that will make up your monthly Mortgage Loan Payment. They are:

  P=Principle. The amount applied to the outstanding balance of the loan.

  I=Interest. The amount of the charge for borrowing the money.

  T=Taxes. 1/12th of the estimated annual real estate taxes on the home.

  I=Insurance. 1/12th of the annual homeowner's insurance premium. This figure will include flood insurance and private mortgage insurance, or PMI, if required.

If the lender requires you to pay the taxes and insurance as part of your mortgage payment, the lender will open an escrow account to hold this money until the payments are due. The escrow account earns interest. Many people consider this convenient because they don't have to make separate payments.

If the lender allows you to pay the taxes and insurance separately:

  You will usually get a quarterly or semi-annual property tax bill.

  You will have to pay a separate insurance premium, usually annually, for homeowner's insurance.

Some people prefer to do this because it allows them to keep the money under their own control in their own savings or investment accounts to earn interest until the payments are due.

However, in many cases, it is better to pay for these items monthly with your loan payment. That way, you don't have to worry about having the money available when it's needed.

Qualifying for a Loan

There are three factors lenders use to qualify you for a loan. They are known as the Three Cs:

  Capacity is your present and future ability to meet your payment obligations.

  Capital refers to your savings and other assets that can be used as collateral for a loan.

  Character refers to how you have paid your bills or debts in the past. Your credit report is one tool lenders use to consider your willingness to repay your debts. Your willingness to repay your debts is important because a mortgage is likely the largest loan you will obtain. See our To Your Credit session for more information on Credit Reports.

Pre-qualifying for a Loan

Pre-qualification is an informal way to find out how much mortgage you can obtain. You can be pre-qualified by giving the lender some basic information over the phone. Such as:

  Employment

  Income

  Down payment information, and

  Outstanding debts

No paperwork is required. There is no obligation. The pre-qualified amount is not exact; it is only a ballpark figure.

Pre-approval

Another term you may hear when discussing mortgage is pre-approval. Pre-approval is a commitment from the lender to lend you money. The pre-approval process lets you know how much you can obtain and tells sellers you are prepared to buy a home.

To obtain pre-approval, you need to assemble financial records and fill out an application. You will usually need:

  Pay stubs for the last 2-3 months

  W-2 forms for the last 2 years

  Tax returns for the last 2 years

  Information about your assets and long-term debts

  Recent bank statements, and

  Proof of any additional income - - you do not need to disclose alimony or child support payments unless you want them considered in repaying the loan.