Finance & Settlement Flashcards
Summarize PITI
Principle, Interest, Taxes, Insurance
Define PMI and why it is used by lenders
PMI is a type of insurance that lenders require for certain mortgages with high LTV ratios. Lenders always accept some level of risk with mortgages. However, PMI can help lower the risk that some mortgages bring. Although you pay for PMI as the borrower, this insurance doesn’t protect you
Principle
Refers to the lump sum you barrow from the lender to buy a home
Interest
Interest rates vary by lender, and the higher a rate, the higher your monthly payment. Your interest rate is basically how much you have to pay a lender in order to borrow the money for your mortgage. At the start of your loan, most of your monthly payment will go toward paying for your interest. For a $250,000 home with a 4% interest rate, you will pay $10,000 in interest the first year. As your principal decreases, so will the amount you pay in interest.
Taxes
You’ll have to pay taxes on your home, the most expensive of which is property tax. Taxes are calculated per year by your local government. Your lender will likely keep this money in an escrow account as you pay it monthly and then use it to pay off the total amount in taxes at the end of the year. Because of this, you may have to pay the difference if you haven’t saved enough.
Insurance
Most mortgage lenders require that you have some sort of homeowners insurance in order to qualify for a loan with them
private mortgage insurance (PMI)
PMI is private mortgage insurance. It’s often required by conventional mortgage lenders to finance loans for individuals who do not have the traditional down payment of (at least) 20 percent. It’s a helpful way to purchase a home with a smaller down payment, but it’s also an expensive option.
Qualifying ratios are
measuring devices that banks and other financial institutions use in their loan underwriting process
Two types: Front end - is a ratio of the mortgage payment, including insurance, taxes and PMI, if applicable, to the borrower’s gross income.
& Back end - is a ratio of the mortgage payment and other liabilities, such as credit card payments, auto loans and personal loans, to the borrower’s gross income.
discount points
Discount points are a type of prepaid interest or fee that mortgage borrowers can purchase to lower the amount of interest on their subsequent monthly payments—spending more up front to pay less later, in effect. Discount points are tax deductible.
