A chart showing how much interest and how much principal (reduction in the loan amount) is included with each monthly payment on a mortgage. For each equal monthly payment, the amount of interest in every payment goes down and the amount going toward principal goes up because the amount of interest every month is based on the loan amount which goes down every month. If a borrower pays more than the minimum payment each month, the loan amount goes down more quickly which can save a lot of interest over time. On a typical 30 year mortgage, if the borrower adds 1/12 of the payment amount to every payment, the loan will be paid off in about 24 years instead of 30 years.
Typically, conventional financing referred to financing that conforms to Fannie Mae and Freddie Mac guidelines. In the greater Charlottesville Area, the maximum mortgage amount is currently $417,000. If a bome buyer uses less than 20% for a down payment, some type of Private Mortgage Insurance (PMI) is required. There is monthly PMI or Lender Paid Mortgage Insurance (LPMI). With LPMI, there is a one time premium paid when the loan is taken out and no additions to the monthly payment.
Most home loans require adding 1/12 of the annual real estate tax bill and 1/12 of the annual homeowners insurance bill to the monthly mortgage payment. These additional funds go into a type of savings account (with no interest being paid) called an escrow account. The bank collecting the mortgage payment pays the tax bill and the insurance bill with the funds in this escrow account. If a borrower is using a down payment of 20% (or a larger down payment), the borrower can opt pay the real estate taxes and homeowners insurance on their own without having to include their cost with the monthly mortgage payment. Almost all banks charge a 0.25% fee when a borrower does not use an escrow account. Lenders charge a bit more when there is no escrow account becuase the loan is a bit riskier. If a homeowner does not pay the tax bill, the local government can foreclose on the property without having to pay off the loan on the property. And if a homeowner does not pay the insurance bill and the home burns down, the lender has lost all the security for the mortgage loan. Banker’s don’t like to lose money so they do what they can to provent a loss.
Federal Housing Administration Financing (FHA) is a popular method of financing a home purchase when a home buyer has little cash for a down payment or if a home buyer’s credit is not perfect. FHA financing requires a minimum down payment of 3.5%. There is an Upfront Mortgage Insurance Premium (1% of the loan amount) that gets added to the loan and the borrower pays an annual premium of 1.15% of the loan amount which gets paid with the monthly mortgage payment. If it can be negotiated with a home purchase, the home seller can pay up to 6% of the purchase price toward the borrower’s closing costs.
Jumbo financing is for loan amounts greater than $417,000. Fannie Mae and Freddie Mac do not purchase these loans so each bank has it’s own guidelines to follow to qualify for this financing.
USDA Rural Housing Financing
Rural Housing (RH) financing is type of financing offered by the United States Department of Agriculture to help finance rural housing. This financing is not available in the City of Charlottesville but once you get about 3 miles outside the city limits, it is available almost anywhere. This is a great program which provides a home buyer with financing up to 100% of the purchase price. If it can be negotiated, the home seller can pay all of the closing costs of the home buyer so it is possible to purchase a home with almost no cash. RH requires a 2% fee which is usually added to the mortgage amount plus a annual fee of 0.3% which gets paid as part of the monthly mortgage payment. A small price to pay to purchase a home with no down payment. There are so income limitations with this program but I’ve found most homebuyers qualify for this program.
VA financing is for qualifying veterans or reservists. For people who qualify, it is a great program that allows a homebuyer to borrow 100% of the purchase price of a home. And if it can be negotiated, the home seller can pay 100% of the home buyer’s closing costs. The first time a veteran used this program, there is a VA Funding Fee of 2.15% of the loan amount which gets added to the mortgage.