Let’s Talk Mortgages

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The mortgage process can seem hectic and crazy, but it doesn’t have to be. As a first-time homebuyer, trying to understand the mortgage process, it felt invasive and from time to time, it gave me anxiety. Looking back, I wish I had a better understanding of the financing options and the meaning of PITI (Principal, Interest, Taxes, and Insurance).  Listed below I have explained the four major types of mortgages used to purchase a home and the meaning of PITI. 

Four Basic Types of Mortgages

  • Conventional Mortgage – Standard loan used by buyers with good to excellent credit who make down payments of at least 5%.
  • FHA Mortgage – More common for buyers with lower credit scores or house hackers looking to occupy a multi-family home like a duplex as they offer a down payment as low as 3.5% and lower interest rates.
  • VA Mortgage – Offered to all veterans and active military members. They provide up to 100% financing, simplified loan approvals, and lower interest rates. VA Mortgages can be much lower than conventional loans.
  • USDA Mortgage – Available to buyers in rural or low-density areas and offer up to 100% financing and below-market interest rates. Their ideal buyers are of average means, have lower credit scores, and are buying modest homes.

Realtor Tip: In my experience, FHA and VA loans tend to be more challenging when it comes to the appraisal process and the processing period (FHA – 30-60 days /VA – 40 to 50 days). 

What’s PITI (Principal, Interest, Taxes, and Insurance) Mean?

  • Principal – This is the repayment of the initial amount you borrowed from your lender (in other words, the price of your home) 
  • Interest – This is the payment to the lender for the money borrowed (and is then added on to the initial price of your home)
  • Taxes – Your annual city and county taxes assessed on your property are divided by the number of mortgage payments you make in a year and added into your mortgage
  • Insurance – Your monthly homeowner’s insurance payment covers you against various hazards and is added to your mortgage payment

Realtor Tip: Be prepared to pay Private Mortgage Insurance (PMI) on a conventional loan until there is 20% equity in the home. Mortgage Insurance Premium (MIP) is an insurance requirement for an FHA loan that is paid upfront and is paid monthly for at least 11 years or the life of the loan. 

Now that you know a little more about the types of mortgages and the meaning of PITI, you will be armed to have a better conversation with your lender. Although I am not a lender, but as a Real Estate Agent and Investor, I currently support clients on their buying journey. The first step to buying a home is working with a lender to get a pre-approval letter to learn what you’re qualified to purchase, and your lender will put you in the best mortgage for your situation. Finally, part of the lender’s job is to provide you with a breakout of the potential cash you will need to close on your property. Nobody wants a surprise at the closing table so continue to ask your lender questions as you go through the process. 

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