Understanding Escrow
Congratulations, you found the home of your dreams and are ready to put some money down and finance the rest. Getting approved for a mortgage (assuming you still need to take this step) involves understanding several matters, items we’ll take a look at right now.
Your Monthly Payments — What a PITI!
PITI is a term you may hear about when you buy your home, an acronym that stands for the following:
Principle: The amount you will be borrowing, to be paid back over the life of the mortgage loan.
Interest: This represents the cost of the money lenders will charge for your using their money to buy your home.
Taxes: The government will tax you to pay for schools, road improvements, and other local services. Property taxes is the chief way that these funds are raised.
Insurance: If you have a loan on your home, then homeowners insurance is required and strongly recommended even if you don’t. Offers protection against fire, theft, earthquake (sometimes) with flood insurance something you can purchase separately through a federal program.
Principal + Interest + Taxes + Insurance (PITI)
= Total Cost of Your Mortgage Loan
Prospective homeowners can forget that beyond principle and interest payments, property taxes and homeowners insurance can impact affordability. PITI is part of the formula that lenders use when calculating your affordability ratios.
Your Escrow
Oftentimes, your property taxes and homeowners insurance will be paid out of an escrow fund and sent directly to the local taxing authority and to your insurance provider. This insures that everyone gets paid (including the mortgage company).
Likely, at the time you make your down payment you’ll have to come up with additional funds which will be deposited into your escrow account and tapped as needed — something to consider when determining if you can afford a home or not.
Ultimately, your mortgage lender will decide whether you can afford to make payments when PITI is taken into consideration.
Further Reading
You’re Only 11 Steps Away From Buying a Home
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