Your mortgage loan is the final result of a recipe that requires several carefully measured ingredients. Just as you might wonder, “What is in Great-Aunt Gertrude’s lemon cake that makes it so dang good?”, you also might wonder, “What is a mortgage recipe I myself can be proud of?”. While we may not have the secret recipe to your great-aunt’s lemon cake, we most certainly know the makings of a great mortgage, so grab a pen - you’re going to want to jot this down!
One Cup of Principal and Interest
Just as making bread relies on flour to take shape, all “what is a mortgage” recipes are only possible with principal and interest. Principal and interest work a lot like oil and vinegar, they’re often paired together, yet they never mix. A percentage of your mortgage is devoted to paying the original balance of your loan, which is known as the mortgage principal, as well as the interest the loan accrues over time. At first, most of your payment tilts towards your interest, but you’ll start to notice more is paid towards your principal as time goes by. It’s best that you make extra payments toward your principal whenever you can to reduce the length of your loan and lower your total interest payments.
One to Two Sprinkles of Insurance
You can expect to see homeowners insurance included with your mortgage loan, which most borrowers are required to have until they’ve paid their loan in full. The amount you can expect to pay for insurance varies according to whether you live in a neighborhood that’s prone to crime, the chances of flooding in your area and the likelihood of your property catching fire. This means that you have a degree of control over how much you have to pay for insurance and the type of coverage you need.
Related: Be prepared for emergencies with our eBook Unexpected Costs of Owning a Home
In addition to traditional home insurance, you may also have to pay Private Mortgage Insurance (PMI). Such policies are common for borrowers who are considered to be credit risks and those who don’t put down a sizable down payment on their homes. First-time home buyers or home buyers with less than 20% down can expect to add a dash of PMI to their “what is a mortgage” recipe.
What is a Mortgage Without a Generous Teaspoon of Taxes
Much like everything else, you have to pay taxes on your mortgage loan. The percentage of your loan that takes care of taxes can vary from month to month. Determining factors include the overall value of your home and the tax policy for your geographic location. To get a better idea of how mortgage tax works, take a look at your statements, which you can get from your lender.
Here is where we should mention something about your real estate taxes and your private mortgage insurance. Lenders often establish a special escrow account for borrowers’ mortgage insurance and taxes. Note that an escrow account is essentially a savings account. Taxes and mortgage insurance may only be due once a year, and mortgage escrow accounts are used to slowly gather those amounts until they need to be paid.
A Stick of Down Payment
As mortgage specialists, we’re here to tell you that loading your “what is a mortgage” recipe up with as much butter- we mean down payment - as you can, will only help you save money in the long run, and is where you want to go absolutely bonkers with saving and planning. Every penny and dollar you can put back for your down payment equals a penny and dollar you can save on your interest payments. The more you pay upfront, the less you have to borrow, which does wonders for your loan-to-value ratio as well as your interest rate. Your loan-to-value ratio is essentially the amount you’re asking to borrow compared with the total value of the property you’re looking to buy. The lower your LTV, the better for you and your lender.
Substituting Home Loan Ingredients
After a few years or maybe even decades you might find that some healthier ingredients have come along to help improve your “what is a mortgage” recipe. These ingredients could be lower interest rates or shorter mortgage terms that can help greatly improve the taste your mortgage recipe leaves in your mouth, or even make room for a new mortgage recipe for a home in your favorite vacation spot! Whether you’re looking for a healthier version of your home loan or want to add a second home loan to your cookbook, Wyndham Capital Mortgage has a home refinance recipe for you to try out.
Treat your mortgage like the delicate dish that it is, and it’s sure to leave a sweet taste in your mouth, and in your wallet.
Ready to start cooking up your mortgage? Get started below!