Mortgage Blog

In most instances your lender will require that you pay property taxes and homeowners insurance along with your monthly mortgage payment. With each monthly payment an appropriate amount is collected and deposited in your “escrow account”. Once a year a disbursement is made from this account to pay your property taxes; also an annual disbursement will be made to cover the premium on your homeowners insurance. You can expect your “escrow” to gradually rise to cover increases in tax and insurance rates.

The lender will calculate the correct amount for your monthly escrow payment using the following formula. Annual tax rate plus annual insurance premium divided by 12.

Property tax

Before you decide to purchase a home you should obtain an estimate of how much your real estate property tax will be. Inquire with your real estate agent or the local taxing authorities for current rates.

Homeowners Insurance

Your Lender will require that you insure your property in order to obtain a mortgage. If you are in a flood zone you may also be required to obtain Flood Insurance. Shop around for the best rates. If you do not already have an insurance agent ask your realtor or mortgage professional for a recommendation.

For loans made after July 1999, lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the loan balance falls below 78 percent of your purchase price — not when you achieve 22 percent equity, which will happen much more quickly with rising property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, regardless of the original purchase price.

Keep track of your principal payments. Also keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven't paid down much principal — it's been mostly interest. But property values in many parts of the country have gone through the roof lately. And that can earn you 20 percent equity even if you haven't paid down much principal.

When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is — and most lenders require one before they'll cancel PMI.

Debt-Income-Ratios

In determining how much of a house you can afford we look at a number of factors. One of the most important of these is “debt-to-income ratio” sometimes simply referred to as “debt-ratio”.

There are two “debt-ratios” that we take into account. The first is the “front-end” or “housing-ratio”.

For this we calculate the total of your prospective payment including principal and interest, property tax and insurance. This total is referred too as your P.I..T.I.. This number typically should not exceed 28% of your total monthly income. The formula used for calculating your housing-ratio is:

Max Housing Ratio = monthly salary x 28%

For an individual making $4,000 per month this would amount to $1,120 in housings expense per month

The next ratio we look at is your “bank-end” or “total debt-income ratio”.

To calculate this we add to the PITI all other monthly payments such as car loans, credit card payments, installment loans, child support etc. This total figure is then divided by the monthly salary amount to calculate your total debt-to-income ratio. This number should typically not exceed 36%.

The formula to use is:

Total debt-to-income ratio = monthly salary x 36%

For an individual making $4,000 per month this would amount to $1,440 in total expenses per month

Exceptions

While these are the standard ratios used by Lenders exceptions are often made when extenuating circumstances exist. Such circumstances might include, above average or excellent credit, financial reserves, large down payment. Some loan programs also offer less strict standards for first time homebuyers. If you would like more information please call us at 1-800-461-2986.

If you made a large downpayment when you bought your home or if you have lived in it for several years you may have accumulated a large amount of “equity”. Equity is the difference between what your home is worth and what you owe on it. If you home is currently worth $300,000 for example and you owe $180,000 then this means you have $120,000 in home equity.

There are two ways to access this equity. The first is with a home equity loan often called a “second mortgage”. This loan has an upfront lump sum and a fixed interest rate. The more common type of equity loan is a Home Equity Line of Credit, often referred to by its acronym as a HELOC. This type of loan works more like a credit card, setting a credit limit and allowing you to borrow up to that amount. One advantage of both types of loan is that they may be tax deductible (please check with your tax professional).

It is also important to remember that both the equity loan and the HELOC are secured by your home and so if you fail to make payments you may face foreclosure. As always you must weigh the benefits and negatives before you make a decision. If you are interested in more information please call our loan specialists at 1-800-461-2986. They will be delighted to answer your questions or get the ball rolling should you choose to go this route.