Mortgage Calculators

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Mortgage Tips and Advice

This part of the site discusses some of the more common mortgage questions you may have.^*

Less Points or Lower Interest Rates?
Some mortgage loans have no "points"; other mortgages have a lower interest rate. This article discusses the pros and cons of each type.

What Does My Credit Score Mean?
About the influence your credit score or FICO score will have on your mortgage application, with a few things you can do to improve your score.

What If I Don't Have A Down Payment?
Things you should know about down payments, with a few ideas to come up with the down payment that most lenders prefer.

What If I'm Turned Down for a Mortgage?
About the steps you could take if your mortgage application is denied.

Mortgage Terminology

A mortgage is a loan you obtain to pay for a home and any land it sits on. The home and land is used for collateral on the loan, which means that if you don't make your payments, the lender can take the home away to cover your missed payments.

The loan principal is the amount you actually borrow to purchase the home.

Interest is the amount the bank charges you to use their money; it is a percentage based on current economic indicators.

Because the loan is for such a high amount, it is usually financed for between fifteen and thirty years. The amount of time is called the loan's term. Principal and interest together comprise most of your payment.

The total is then divided into equal payments over the life of the loan using a process called amortization. With amortization your payments mostly go toward interest early in the loan and then more goes toward the principal later in the life of the loan.

For example, if you borrow $100,000 dollars with a 30-year loan at 7% interest, amortization will calculate your payments something like this:

Payment	Amount	Interest	Principal	Balance
First Payment	$665	$583	$82	$99,918
At 5 Years	$665	$550	$115	$94,132
At 10 Years	$665	$501	$164	$85,812
At 20 Years	$665	$336	$329	$57,300
Last Payment	$665	$4	$661	$0

In this example, after thirty years you would have paid off the $100,000 you originally borrowed, but you also would have paid an additional $139,509 in interest. (Try our online amortization schedule calculator to experiment with your own figures.)

Your total payment is more than just the principal and interest. The acronym PITI can help you remember all the parts of your payment. It stands for principal, interest, taxes, and insurance.

If you put less than twenty percent down on the loan, the bank considers it a little riskier and requires an escrow account. They pay your annual insurance and taxes from this account and collect money monthly to gather the required amounts.

If you have less than twenty percent down, your lender will probably also require you to include an amount for private mortgage insurance (PMI) in your payment. These are then added to the required principal and interest amounts to total your monthly payment.

Rent Before Applying for a Mortgage

While many young, potential homeowners stay at home to save money for their future mortgage payments, banks and lenders consistently decline applicants without rental history.

Though it makes perfect sense to live at home to save money on things such as rent, groceries, utilities and the like, it does little to prove you’ll be a sound borrower when you finally do move out.

Banks and lenders like to see your history whether it’s in the form of credit cards, auto loans, or a previous lease. If you fail to provide these things, banks and lenders will be hesitant to lend to you.

Sure you can ask daddy to co-sign for you, but if you don’t have that luxury, don’t plan on getting financing for that new home unless you can provide a VOR (Verification of Rent) for the previous 12 months. And no, providing a VOR from a family member won’t fly in most cases, even if you insist that you pay your parents rent each month. It really doesn’t make sense from the lenders’ point of view.

If you don’t have a current housing payment and suddenly take on a mortgage payment at several thousand dollars a month, banks and lenders are going to bet you may default on making your payment.

This theory is called payment shock, and is defined by an increase in your monthly housing payment beyond two-hundred percent. In other words, if your payment more than doubles, you’re labeled a risky borrower.

Let’s look at an example:

Borrower A
Current housing payment living at home: $0
Proposed mortgage payment: $2,500

Borrower B
Current housing payment: $1,500
Proposed mortgage payment: $2,750

Clearly Borrower B will be favored for financing over Borrower A based on rental history alone. But if you insist upon living at home or rent-free, there is an exception. Drop 10% or more as your down payment and many banks and lenders won’t ask for rental history.