PMI – PMI is known as “private mortgage insurance” and is mandatory for any loan with less than 20% of a down payment. This mortgage insurance protects your lender against any default on the loan. While your exact PMI will vary based on your loan amount and down payment, it’s typically about .5% to 1% of the loan, spread out over the term of your loan. PMI helps many families afford a home, even if they cannot come up with the 20% down payment in one lump sum. Also, it’s important to keep track of your remaining principal balance on your mortgage, since The Homeowners Protection Act requires lenders to cancel PMI once it your balance falls under 80%. If you don’t keep track of your principal balance, your lender is required to automatically cancel your PMI payments when the balance hits 78%, meaning you could be potentially paying unnecessarily PMI for quite a few payments.

Interest – The interest on your loan is one of the most important factors in your monthly payment and how quickly you will be paying down your principal. The way interest works is simple; Say you have a $100,000 loan with a 6% interest rate. You will take your annual interest rate of 6% and divide it by the 12 months of the year. So 6% divided by 12 would be a .5% monthly interest rate. Next multiply your monthly interest rate by your principal loan balance of $100,000 and you will have a $500 monthly interest payment. If your monthly payment of principal and interest is $599.55, then you’ve only paid down your principal by $99.55 and will now repeat the process to find the interest on $99,900.45 for your next month’s payment.

Escrow – Your lender wants to protect themselves in every way possible, since it’s very common for a homeowner to default on a loan. For this reason your lender will most likely want to keep an escrow account of homeowner’s insurance and taxes, to ensure that your accounts will be paid on-time. An escrow account helps you as the homeowner, since you are paying monthly towards these two major expenses, instead of running into them once a year. Any home bought with a loan will need to have homeowner’s insurance, since a tornado, hurricane or flood could do extreme damage to a home. Insurance protects their interest in your property. Also, a lender would want to escrow your taxes because defaulting on your taxes can lead a homeowner into foreclosure, which could threaten a lender’s interest in the home as well.

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