Calculating Mortgage Costs

by Lili Patch 07/24/2019

Learning the nuances of buying a home does not take a college degree in mathematics. You do not even need to know calculus or trigonometry. The numbers all come from multiplication, division, and percentages. However, understanding the numbers is not all there is to know about mortgages. Debt finance has a language of its own, so here are some terms you may run across, what they mean, and how to use them.

What the terms mean

  • Mortgage: A mortgage is a legal agreement between a lender (a bank or other creditor) and the mortgagee (the person receiving the funds from the loan) at a specific interest agreement for a specified length of time in exchange for taking the title or deed of the debtor’s property. Until the debt is paid in full, the condition of a mortgage typically is that the full ownership of the property remains with the mortgage lender. In simpler terms, this means that the bank or lender owns the home (or a percentage of it) until the debt is paid. The homeowners have use of the house for as long as they fulfill the terms of the mortgage agreement.
  • Interest. The fee charged for the use of the money in the mortgage based on a percentage of the total amount. Interest percentages can be fixed (they do not change for the life of the loan) or variable—also call adjustable because they can vary based on outside, pre-determined circumstances.
  • PITI. This acronym stands for principle, interest, taxes, and insurance. Together, these four items denote the amount of a mortgage payment when taxes and insurance are held in escrow.
  • Escrow. When monies for taxes or insurance are collected monthly but not paid until they are due—usually quarterly for insurance and annually for taxes—they are held by a third party and protected until paid out.
  • Amortization. The amount of interest you pay monthly on a mortgage is more significant at the beginning because it is based on the amount of principal owed. As the principal reduces, the amount of the payment that is interesting also reduces so more of the fee goes toward the principal. At the beginning of a loan with a fixed interest and fixed length, all the costs, and the principal-to-interest breakdown are available on an amortization chart.

When you buy a home with a mortgage, typically after paying a down payment (a portion you pay outside the mortgage) the rest is amortized using a standard calculation for every payment for the length of the loan. You do not need to learn the formula, though, because several mortgage calculators exist online to do it for you. Try this one with the amounts of your potential purchase, down payment, interest rate, and term (in years).

About the Author
Author

Lili Patch

Radio Personality turned Realtor; I welcome the opportunity to turn house selling and house hunting into a fun and educated experience. House buying should feel like you're shopping with a friend, and I will keep you in the loop the entire time so you will not be wondering what you just signed or what happens next. It's that seamless, and we may even have lunch or dinner. I do this because when I started my real estate journey on the east coast, buying my first condo at the age of 18, I was clueless. I wished I had someone who had made that a stress free transaction- but it wasn't, and thats how I got the Real Estate bug. Let's take a step back first though to my first "job", I studied communications and entered the broadcasting industry. Through the years I purchased some more properties, and felt there was a gap that needed to be filled in the Real Estate profession. I set the bar very high on skill set & customer service. I have Real Estate Licenses in 4 states, which means I have more education, and training than most agents. My level of knowledge, strategy and experience is what sets me apart. I know how important being an astute negotiator is, being relentless, and answering the phone when it rings. I have earned certifications as a Seller Representative Specialist (SRS), a Certified Home Marketing specialist (CHMS), and a Pricing Strategy Advisor (PSA).

Meeting with people and traveling both east coast and west coast has given me a broad appreciation of the different laws, protections, and scenario's you encounter in real estate. Having the benefit of my communication background coupled with the vast knowledge of multi-state experience has been the backbone of my success.