Principle and Interest
The first item on your house note will be the Principle and Interest calculation for the original amount of your loan. Using a good Mortgage Calculator, simply plug in the current interest rate and the number of years.
The Mortgage Calculator on my website not only provides you the monthly amount of principle and interest, it will also give you a printout of the accumulated principle and interest over the term of the loan.
Most mortgages are written using 30 yrs. However, if you plug in 15 years, you can see the difference in the amount of the payment. If you feel comfortable with a higher monthly payment, you will be able to pay down the principle much sooner and save a considerable amount of interest.
PMI– What’s That?
If you a financing with less than a 20% down payment, the lender will add onto the loan PMI. That’s Private Mortgage Insurance and it will be collected until at least 20% of the principle has been paid.
Have you heard of Fannie Mae or Freddie Mac? These are companies that insure mortgages so that if a borrower defaults, the bank (your lender) will have part of their loan insured. It lessens the lender’s risk since they have considerably more money invested in the home than the borrower. That’s one of the reasons you hear them mentioned on the news so much these days. With all the foreclosures and ‘short sales’, these large home loan insurers are taking a heavy hit.
Anyway, point is, the lender will add PMI to your monthly payment. The rate varies, but it is a fairly nominal amount – less than a half of a percent.
Insurance – Homeowners and Flood
As long as you have a mortgage, your lender has a vested interest in knowing your home is fully insured in the event of a fire, flood, or hurricane. After all, he probably has more money invested in your new home than you do. Right?
Insurance premiums are always paid in advance. So at the Act of Sale, you will pre-pay the first year of insurance premiums. (Part of your closing costs.) Then the lender will collect two months of premiums to start your Escrow Account.
Thereafter, for the life of your mortgage, the lender will continue to collect escrow in order to pay your premiums each year upon renewal. Depending on what next year’s premium might be, you will no doubt receive a letter from your lender once a year detailing your escrow account and how much, if any, the monthly escrow deposit needs to be adjusted.
Just as the lender collects insurance premiums on your behalf, they will also collect property taxes. Although you may receive a re-assessment letter from the Assessor’s Office over the course of your loan, you will never pay your property taxes direct. They will be paid by your lender from your escrow account. This assures the lender that the property will not go into a Sheriff’s sale for failure to pay property taxes.
How to Estimate Your Monthly House Note –
First calculate the principle and interest at today’s prevailing rate. If you are buying with less than 20% down, use an interest rate about a quarter point higher than the current rate to allow for PMI. (Instead of 4%, estimate using 4.25%)
Then add an estimated amount for insurance and tax escrow. Your lender can usually give you a ballpark figure. Or you can call the agent who handles your auto insurance and ask him for a rough estimate. Just understand that the actual premium will depend on exactly where the home is located and how much it is worth.
And of course, the last thing is property tax. In St Tammany Parish, the Assessor has a website where you can check the existing taxes on a property. However, keep in mind, the current tax can change based on a new assessment, homestead exemption, and even the age of the homeowner. (The rate gets locked in for senior citizens.)