The Basics of Financing

There are a lot of different terms and acronyms used in the mortgage world. This page will help explain everything to you so you have a good understanding of what to expect. I’m also a licensed mortgage loan officer with the state of Colorado so my knowledge of the process goes deeper than most agents.

P=PRINCIPLE

The balance on your loan apart from the interest. This is the part that pays down your balance and builds equity.

 

I=INTEREST

The interest you pay to the lender to compensate them for lending the principle.

 

T=TAXES

The property tax payment on  your home paid in monthly increments to the lender. The lender then pays the property taxes when due.

 

I=INSURANCE

Commonly referred to as homeowner’s insurance which protects your home and possessions from the risks of fire, flood, accidents on your property, and other disasters.

 

The components of PITI will make up your monthly mortgage payment and will be paid to the lender in one single payment. Depending on how much money you put down and the property you might also have to factor in the following possible costs when estimating your budget.

 

PRIVATE MORTGAGE INSURANCE (PMI)

PMI is a form of insurance required when a homebuyer takes out a conventional loan with less than a 20% down payment. The mortgage insurance protects the lender against loss if you default on the loan. PMI maybe removed from your mortgage once the balance due on the loan reaches 80% of the home’s value either through paying the loan down or the appreciation of your home. Rates vary depending on your credit score.

 

MONTHLY MORTGAGE INSURANCE POLICY (MIP)

All homeowners with a Federal Housing Administration (FHA) loan are required to pay monthly mortgage insurance regardless of how larger their down payment is. In addition to the monthly mortgage insurance payment for FHA loans there is an upfront mortgage insurance fee of 1.75% of the loan. Mortgage insurance on an FHA loan cannot be removed for the life of the loan.

 

HOMEOWNER’S ASSOCIATION FEES (HOA)

An HOA is an organization that enforces covenants and rules and maintains shared property such as open spaces, parks, community pools, or common areas in a condo. If you buy a home in a community with a homeowner’s association,  you will become a member of that HOA, and will be responsible for any HOA fees. Sometimes these fees are paid quarterly, and sometimes monthly. Any HOA fees will be paid separately from your monthly mortgage payment.

 

ADDITIONAL TAXES

The Denver metro area has a lot of special taxing districts. While the vast majority of these will be included in your property tax bill the number of districts and the amount they charge can vary dramatically. Homes in Stapleton are located in a high number of special districts with a corresponding high tax bill. Homes in places like Westminster and Northglenn might only pay into a few special districts such as the North Metro Fire Protection District which provides fire fighting and ambulance service to residents.