DO THIS: GET IN CONTACT WITH YOUR LENDER TO DISCUSS THE REMAINING BALANCE ON YOUR MORTGAGE — AND WHEN YOUR PMI, IF YOU HAVE IT, CAN BE DROPPED. IF YOU’RE BUYING, CHAT WITH YOUR LOAN OFFICER ABOUT FINANCING YOUR UPFRONT MORTGAGE INSURANCE INTO A LOW-DOWN-PAYMENT LOAN, LIKE AN FHA, OR SEE IF YOU’RE ELIGIBLE FOR LOANS WITHOUT MORTGAGE INSURANCE, LIKE A VA LOAN.
The US Treasury administers the Hardest Hit Fund, which provides aid to the states that were most impacted by the economic crisis. Each of these states have local agencies that help homeowners in various ways, including mortgage payment assistance for the unemployed, principal reduction, and transactional assistance. This helps people either afford the homes they’re in, or move to more affordable housing.
What I want to do with this video is explain what a mortgage is but I think most of us have a least a general sense of it. But even better than that actually go into the numbers and understand a little bit of what you are actually doing when you’re paying a mortgage, what it’s made up of and how much of it is interest versus how much of it is actually paying down the loan. So, let’s just start with a little example. Let’s say that there is a house that I like, let’s say that that is the house that I would like to purchase. It has a price tag of, let’s say that I need to pay $500,000 to buy that house, this is the seller of the house right here. And they have a mustache, that’s the seller of the house. I would like to buy it. I would like to buy the house. This is me right here. And I’ve been able to save up $125,000. I’ve been able to save up $125,000 but I would really like to live in that house so I go to a bank, I go to a bank, get a new color for the bank, so that is the bank right there. And I say, Mr. Bank, can you lend me the rest of the amount I need for that house, which is essentially $375,000. I’m putting 25 percent down, this right, this right, this number right here, that is 25 percent of $500,000. So, I ask the bank, can I have a loan for the balance? Can I have a $375,000 loan? And the bank says, sure, you seem like, uh, uh, a nice guy with a good job who has a good credit rating. I will give you the loan but while you’re paying off the loan you can’t have the title of that house. We have to have that title of the house and once you pay off the loan we’re going to give you the title of the house. So what’s going to happen here is we’re going to have the loan is going to go to me, so it’s $375,000, $375,000 loan. Then I can go and buy the house, so I’m going to give the total of $500,000, $500,000 to the seller of the house and I’ll actually move into the house myself, assuming I’m using it for my own residence. But the title of the house, the document that says who actually owns the house, so this is the home title, this is the title of the house, home, home title. It will not go to me. It will go to the bank, the home title will go from the seller, maybe even the seller’s bank, maybe they haven’t paid off their mortgage, it will go to the bank that I’m borrowing from. And this transferring of the title to secure a loan, I say secure a loan, I’m saying, look, I need to give something to the lender in case I don’t pay back the loan or if I just disappear. So, this is the security right here. That is technically what a mortgage is. This pledging of the title for, as the, as the security for the loan, that’s what a mortgage is. And actually it comes from old French, mort, means dead, dead, and the gage, means pledge, I’m, I’m a hundred percent sure I’m mispronouncing it, but it comes from dead pledge. Because, I’m pledging it now but that pledge will eventually die once I pay off the loan. Once I pay off the loan this pledge of the title to the bank will die, it’ll come back to me. And that’s why it’s called a dead pledge or a mortgage. And probably because it comes from old French is the reason why we don’t say mort gage. We say, mortgage. But anyway, this is a little bit technical but normally when people refer to a mortgage they’re really referring to the loan itself. They’re really referring to the mortgage, mortgage, the mortgage loan. And what I want to do in the rest of this video is use a little screenshot from a spreadsheet I made to actually show you the math or actually show you what your mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, mortgage, or actually, even better, just go to the download, just go to the downloads, downloads, uh, folder on your web browser, you’ll see a bunch of files and it’ll be the file called mortgage calculator, mortgage calculator, calculator dot XLSX. So, it’s a Microsoft 2007 format. But just go to this URL and then you’ll see all of the files there and then you can just download this file if you want to play with it. But what it does here is in this kind of dark brown color, these are the assumptions that you could input and that you can change these cells in your spreadsheet without breaking the whole spreadsheet. So, here I would assume the 5.5 percent interest rate. I’m buying a $500,000 home. It’s a 25 percent down payment, so that’s the $125,000 that I had saved up, that I’d talked about right over there. And then the, uh, loan amount, well, I have the $125,000, I’m going to have to borrow $375,000. It calculates it for us and then I’m going to get a pretty plain vanilla loan. This is going to be a 30-year, so when I say term in years, this is how long the loan is for. So, 30 years, it’s going to be a 30-year fixed rate mortgage, fixed rate, fixed rate, which means the interest rate won’t change. We’ll talk about that in a little bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not change over the course of the 30 years. We will see that the amount I borrowed changes as I pay down some of the loan. Now, this little tax rate that I have here, this is to actually figure out, what is the tax savings of the interest deduction on my loan? And we’ll talk about that in a second, we can ignore it for now. And then these other things that aren’t in brown, you shouldn’t mess with these if you actually do open up this spreadsheet yourself. These are automatically calculated and this right here is a monthly interest rate. So, it’s literally the annual interest rate, 5.5 percent, divided by 12 and most mortgage loans are compounded on an monthly basis. So, at the end of every month they see how much money you owe and then they will charge you this much interest on that for the month. Now, given all of these assumptions, there’s a little bit of behind the scenes math and in a future video I might actually show you how to calculate what the actual mortgage payment is. It’s actually a pretty interesting problem. But for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent interest rate. My mortgage payment is going to be roughly $2,100. Now, right when I bought the house I want to introduce a little bit of vocabulary and we’ve talked about this in some of the other videos. There’s an asset in question right here, it’s called a house. And we’re assuming that it’s worth $500,000. We are assuming that it’s worth $500,000. That is an asset. It’s an asset because it gives you future benefit, the future benefit of being able to live in it. Now, there’s a liability against that asset, that’s the mortgage loan, that’s the $375,000 liability, $375,000 loan or debt. So, if you are, if this was your balance sheet. If this was all of your assets and this is all of your debt and if you were essentially to sell the assets and pay off the debt. If you sell the house you’d get the title, you can get the money and then you pay it back to the bank. Then, well actually, it doesn’t necessarily go into that order but I won’t get too technical. But if you were to unwind this transaction immediately after doing it then you would have, you would have a $500,000 house, you’d pay off your $375,000 in debt and you would get in your pocket $125,000, which is exactly what your original down payment was but this is your equity. And the reason why I’m pointing it out now is I’m, in this video I’m not going to assume anything about the house price, whether it goes up or down, we’re assuming it’s constant. But you could not assume it’s constant and play with the spreadsheet a little bit. But I, what I would, I’m introducing this because as we pay down the debt this number is going to get smaller. So, this number is getting smaller, let’s say at some point this is only $300,000, then my equity is going to get bigger. So, you can kind of view equity as how much value do you have after you pay off the debt for your house? If you were to sell the house, pay off the debt, what do you have left over for yourself? So, this is really kind of your, this is the real wealth in the house, the owner is, this is what you own, wealth in house or the actual what the owner has. Now, what I’ve done here is, well, actually before I get to the chart, let me actually show you how I calculate the chart and I do this over the course of 30 years and it goes by month. So, so you can imagine that there’s actually 360 rows here on the actual spreadsheet and you’ll see that if you go and open it up. But I just want to show you what I did. So, on month zero, which I don’t show here, you borrowed $375,000. Now, over the course of that month they’re going to charge you 0.46 percent interest, remember that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I haven’t made any mortgage payments yet. So, I’ve borrowed $375,000, this much interest essentially got billed up on top of that, it got accrued. So, now before I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I’m a good guy, I’m not going to default on my mortgage so I make that first mortgage payment that we calculated, that we calculated right over here. So, after I make that payment then I’m essentially, what’s my loan balance after making that payment? Well, this was before making the payment so you subtract the payment from it, this is my loan balance after the payment. Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I started with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has gone up by exactly $410. Now, you’re probably saying, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000. Shouldn’t this debt have gone down by $2,000 and my equity have gone up by $2,000? And the answer is no, because you had to pay off all of this interest, all of this interest. So, that very, in the beginning, your payment, your $2,000 payment is mostly interest. Only $410 of it is principal. But as you, and then you, and then, so as your loan balance goes down you’re going to pay less interest here and so each of your payments are going to be more weighted towards principal and less weighted towards interest. And then to figure out the next line, this interest accrued right here, I took my, your old, your loan balance exiting the last month multiply that times 0.46 percent and you get this new interest accrued. This is your new prepayment balance. I pay my mortgage again. This is my new loan balance. And notice, already by month two, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you’re going to see that it’s an actual, sizable difference. And that’s what this chart shows us right here. This is the interest and principal portions of our mortgage payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you notice, this is the exact, this is exactly our mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to actually pay down the principal, the actual loan amount. The rest of it went to pay down interest, the interest for that month. Most of it went for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller, each of my payments, there’s less interest to pay, let me do a better color than that. There is less interest, let’s say if we go out here, this is month 198, over there, that last month there was less interest so more of my $2,100 actually goes to pay off the loan. Until we get all the way to month 360 and you can show, see this in the actual spreadsheet, at month 360 my final payment is all going to pay off the principal, very little if anything of that is interest. Now, the last thing I want to talk about in this video without making it too long is this idea of a interest tax deduction. So, a lot of times you’ll hear financial planners or realtors tell you, hey, the benefit of buying your house is that it, it’s, it has tax advantages, and it does. Your interest is tax-deductible. Your interest, not your whole payment. Your interest is tax deductible, deductible. And I want to be very clear with what deductible means. So, let’s for instance, talk about the interest fees. So, this whole time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest. So, on month one, $1,700 of that was interest. That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller tax-deductible portion of my actual mortgage payment. Out here the tax deduction is actually very small. As I’m getting ready to pay off my entire mortgage and get the title of my house. Now, I want to be very clear on this notion of what tax-deductible even means ‘cause I think it is misunderstood very often. This doesn’t mean, let’s say that, let’s say in one year, let’s say in one year I paid, I don’t know, I’m going to make up a number, I didn’t calculate it on the spreadsheet. Let’s say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. Remember, my actual payments will be higher than that because some of my payments went to actually paying down the loan. And, but let’s say $10,000 went to interest. To say this deductible, and let’s say before this, let’s say before this I was making $100,000. Let’s put the loan aside, let’s say I was making $100,000 a year and let’s say I was paying roughly 35 percent on that $100,000. I won’t go into the whole, uh, tax structure and the, and the different brackets and all of that. Let’s say, you know, if I didn’t have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is just a rough estimate. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have normally owed and only paid $25,000. What it means is, I can deduct this amount from my income. So, when I tell the IRS how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 because I was able to deduct this, not directly from my taxes, I was able to deduct it from my income. So, now if I only made $90,000 and I, and this is I’m doing a gross oversimplification of how taxes actually get calculated. And I paid 35 percent of that, let’s get the calculator out. Let’s get the calculator. So, 90 times .35 is equal to $31,500. So, this will be equal to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another way to think about it if I paid $10,000 interest, I’m going to, and my tax rate is 35 percent, I’m going to save 35 percent of this in actual taxes. This is what people mean when they say deductible. You’re deducting it from the income that you report to the IRS. If there’s something that you could actually take straight from your taxes, that’s called a tax credit. So, if you were, uh, if there was some special thing that you could actually deduct it straight from your credit, from your taxes, that’s a tax credit, tax credit. But a deduction just takes it from your income. And so, in this spreadsheet I just want to show you that I actually calculated in that month how much of a tax deduction do you get. So, for example, just off of the first month you paid $1,700 in interest of your $2,100 mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700. I will save $600 in taxes on that month. So, roughly over the course of the first year I’m going to save about $7,000 in taxes, so that’s nothing, nothing to sneeze at. Anyway, hopefully you found this helpful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the assumptions in this brown color unless you really know what you’re doing with the spreadsheet. And you can see how the, this actually changes based on different interest rates, different loan amounts, different down payments, different terms, different tax rates, that’ll actually change the, the tax savings and you can play around with the different types of fixed mortgages on this spreadsheet.
In addition to the loan modification programs mentioned above, Wells Fargo has other options and programs that struggling homeowners can use to get help with paying their mortgage. Examples include principal reduction and forbearance. For example, they have written off tens of billions of dollars in principal that is due from a homeowner. Find additional Wells Fargo mortgage assistance programs.
Are you looking for information about grant programs that may help with mortgage payments? Through the Department of Housing and Urban Development (HUD), the federal government offers mortgage payment assistance to the public. States and non-profit agencies have followed the federal government's lead and also offer mortgage payment grants. While competitive, these grants can help homeowners get back on their feet and avoid foreclosure.
If you can afford the higher payments, or are willing to buy a less expensive home, a 15-year mortgage can save you thousands of dollars in interest and can allow you to own your home free and clear in half the time. Fifteen-year interest rates are about one percentage point lower than 30-year rates, and you might be surprised how much the combination of a lower rate and shorter amortization period can save you.
The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.
As you’re comparing quotes, ask whether any of the lenders would allow you to buy discount points, which means you’d prepay interest up front to secure a lower interest rate on your loan. How long you plan to stay in the home and whether you have money on-hand to purchase the points are two key factors in determining whether buying points makes sense. You can use this calculator to decide whether it makes sense to buy points.
FHA Special Forbearance: If you are having difficulty making mortgage payments because you are unemployed and have no other sources of income, you may be eligible for FHA's Special Forbearance. FHA now requires servicers to extend the forbearance period, by offering a reduced or suspended mortgage payment for up to twelve months, for FHA borrowers who qualify for the program.
A third option – usually reserved for affluent home buyers or those with irregular incomes – is an interest-only mortgage. As the name implies, this type of loan gives you the option to pay only interest for the first few years, and it’s attractive to first-time homeowners because of the low payments during their lower earning years. It may also be the right choice if you expect to own the home for a relatively short time and intend to sell before the bigger monthly payments begin.
Yes, the word “homework” makes us shudder too, but this time the reward is much bigger than memorizing geometry theorems or the periodic table. You’re finding a home but you’re also making a financial commitment you’ll have to live with for years: get the best deal you can. Research loans, rates and brokers exhaustively before you sign or commit to anything. Doing the hard work now will pay off down the road with a better rate and terms.
So one thing that makes a mortgage different from other types of loans is that it is backed up by something – in this case, your home. They call this a “collateralized loan.” Credit cards are also loans, but they aren’t backed up by anything. If you fail to make your credit card payments, the credit card companies can’t take your home away from you.
The mortgage industry standard is a 20% down payment. However, you may be able to get a conventional mortgage with significantly less money up front -- as low as 3% of the purchase price in many cases. Specialized loan types, such as VA and USDA mortgages require no down payments at all for those who qualify. The point is that while a higher down payment will lower your monthly housing costs, you may be able to get into a home with less money in savings than you think.
LendingTree, LLC is a Marketing Lead Generator and is a Duly Licensed Mortgage Broker, as required by law, with its main office located at 11115 Rushmore Dr., Charlotte, NC 28277, Telephone Number 866-501-2397 (TDD/TTY). NMLS Unique Identifier #1136. LendingTree, LLC is known as LT Technologies in lieu of true name LendingTree, LLC in NY. LendingTree technology and processes are patented under U.S. Patent Nos. 6,385,594 and 6,611,816 and licensed under U.S. Patent Nos. 5,995,947 and 5,758,328. © 2016 LendingTree, LLC. All Rights Reserved. This site is directed at, and made available to, persons in the continental U.S., Alaska and Hawaii only.
It’s short for private mortgage insurance. It’s usually required if you put less than 20 percent down on your house, and it protects the lender in case you default. The cost varies, as do the methods to get rid of the PMI once you have 20 percent equity in your home. Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.
Closing costs. Closing costs are expenses over and above the sales price of a home. They may include origination fees, points, appraisal and title fees, title insurance, surveys, recording fees and more. While fees vary widely by the type of mortgage you get and by location, Realtor.com estimates that they typically total 2 to 7 percent of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500 (a wide range indeed, Realtor.com acknowledges).
This website provides general information about Keep Your Home California, its programs and services, and summarizes major policies and guidelines pertaining to foreclosure prevention assistance. Website content does not always reflect the most recent changes to programs or services nor is it intended to be a comprehensive resource for determining program eligibility. Program descriptions are intended to provide a broad overview of current programs and may not include all of the elements considered in the eligibility process. Keep Your Home California reserves the right to change, delete, supplement or otherwise amend, at any time, the information, requirements, policies, procedures and program descriptions contained on this website.
• Be ready to move fast. A well-located house in good condition and priced right will sell quickly; it can even be the first day it goes on the market. A buyer needs to be ready to commit if they find a home they like because they risk the chance of losing it if they don’t. One of the things First Ohio Home Finance is known for is how quickly they work for their customers.
“Now is the time to start the process. More than 75 percent of credit reports are said to have some incorrect data. Often a difference of two points in your credit score can make a drastic difference in your interest rate and/or loan fees. Making sure you are prepared from a credit standpoint is the most important part of the process. Secondly, make sure you are staying current on all your liabilities. And lastly, when you sit down with us, you will know you are with an industry leader in Movement Mortgage. We love and value people here at Movement. It shows in how we take care of you while guiding you through the process.”–Bodie Shepherd, Market Leader, Chico, CA
There are cases where your mortgage can factor into your other financial plans, making them more or less attainable. For example, Charlie Donaldson, MBA, College Funding Advisor at College Bound Coaching, says, “The amount of your home equity can count against you when attempting to get financial aid to pay for your child’s college education, potentially costing you tens of thousands of dollars each year your child is in college.”
Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.
Everyone should make sure their credit score is as high as it possibly can be. If you high credit card balances, pay them below 15% of the credit limit. Dispute negative account information with the credit bureaus. Contact your creditors and negotiate a pay for delete. If you have a friend or family member with a credit card in good standing have them add you as an authorized user.
In some cases, you may not be required to provide all of that information. Some loans are referred to as low doc or no doc because they don't require you to prove any of the statements that you make to your underwriter. These loans are normally more expensive, but can be easier to obtain. Additionally, you can obtain a preauthorization before you submit an offer on a home you would like to buy. That can speed up the process, and also shows the seller that you are serious about the purchase.
Note that the Hope for Homeowners program indicated above has been expanded. Families can now receive aid on a second mortgage, and more lenders are participating and cooperating with the FHA. Banks and lenders have been provided further incentive to participate in the program. Find how the FHA Expanded Hope for Homeowners to assist more borrowers.