What’s included in your mortgage payment? Think PITI.

By Sabrina Karl

If you’ve ever played with a mortgage calculator to test monthly payments for different terms and rates, you know these calculators will spit out a payment amount that’s precise to the penny. The only problem? For most people, your monthly payment will be higher. And likely a lot higher.

The reason is that mortgage calculators compute only one thing: the amount you’ll owe the lender for your loan. Spread your loan amount over the term of your mortgage, then add interest, and this gives you your monthly payment to the lender.

This portion of the payment is called principal (P) and interest (I). But owning a home includes two additional expenses that aren’t optional, and they come with the letters T and I.

T stands for taxes, or the property tax that will be assessed on your home. While these taxes are due just once a year, most homeowners pay 1/12th of the annual amount into escrow once a month, tacked onto their monthly principal and interest payment.

Then comes I, for insurance. Everyone with a mortgage is required to carry homeowner’s insurance. Like property taxes, the insurance premium is usually due once a year, but is often escrowed in 1/12th payments that are also added to your mortgage payment.

For homeowners putting less than 20 percent down on their home, private mortgage insurance (PMI) will also be required, until your equity in the home builds to at least 80 percent. For these homeowners, PMI is a fifth component in your monthly payment.

Put these all together and a homeowner’s “all in” payment every month is characterized as PITI. So go ahead and start with that initial mortgage calculator number, but then determine what you’ll need to tack on for taxes and insurance to calculate your actual monthly obligation.

What is a mortgage broker, and should I use one?

By Sabrina Karl

If you’ve begun shopping for a new mortgage, you may be feeling daunted. With so many competing lenders and mortgage options, finding the best loan can easily overwhelm even the best of us.

Fortunately, you don’t have to go it alone. Whether you want help making the best mortgage choice, or don’t have time to manage the cumbersome back-and-forth process, or simply want to secure the very lowest rate possible, a mortgage broker may be the perfect professional to enlist.

Mortgage brokers serve as an intermediary between you and an ultimate lender. But before reaching a final selection, the broker does all the legwork of collecting your documents, checking your credit, income and employment, and applying for several loans on your behalf.

In addition to serving as a mortgage concierge, brokers also offer access to a wide variety of lenders and products. Because they typically have relationships with a stable of lenders, and will also seek out any additional mortgage products that might well suit your needs, brokers can often lead you to a lower rate or better terms than you would have unearthed yourself.

And that’s just the shopping and selection process. After choosing a lender, the mortgage broker also helps you complete the loan’s underwriting and closing.

Of course, you’re right to assume this service comes at a cost. Mortgage brokers are licensed and regulated professionals, and generally are paid by charging a loan origination fee. The typical fee is 1 percent of your loan amount, so closing on a $250,000 mortgage would carry a $2,500 mortgage broker’s fee.

For that price, mortgage brokers can transform the entire home loan process from lengthy, time-consuming, and sometimes confusing to a much easier and efficient process that may additionally save you money over the life of your mortgage.

Top 3 reasons mortgage applications are denied

BY Sabrina Karl

It’s estimated that about 1 of every 8 mortgage applications is denied. And the vast majority are rejected for one of three reasons.

According to a Federal Reserve study of 2015 mortgage application data, the No. 1 factor behind mortgage denials is failing the lender’s debt-to-income (DTI) ratio test. This calculation indicates what proportion of your monthly income is allocated to recurring debts, including your new mortgage payment.

If the sum of your monthly payments to credit cards, car loans, student loans and your new mortgage totals $3,000, and your monthly gross income is $6,000, your DTI would be 50 percent. But lenders want to see that ratio at 45 percent or lower, so exceeding it will likely get your application stamped “Denied”.

Almost as common in triggering rejections is an inadequate credit score or history. If your score is too low, that’s an obvious red flag. But a decent score isn’t enough on its own. Lenders also want to see a sufficient length and breadth of credit history, meaning someone with a single credit card on their report, opened in the last year or two, won’t give the lender ample evidence to predict your payment behavior.

The third most common reason for denial is a problem with the property’s price. If the appraisal finds the price is significantly higher than the home’s fair market value, the lender won’t be willing to fund the originally requested mortgage amount. This often happens in bidding war situations, where the price is driven high enough that the winner actually becomes a loser in finalizing the mortgage.

All of these problems can be solved by the applicant either over time or by choosing a different property. But being aware of these factors in advance may save you from being rejected in the first place.

Should I pay my 2018 property taxes by December 31?

By Sabrina Karl

If you’re like most American homeowners, an envelope recently arrived in your mailbox detailing what to cough up for this year’s property taxes. But the bill comes with a choice: Should you pay this year or in January?

As with many questions, it depends. How you expect your taxable income next year to compare to this year’s is one factor, as is the amount of your property tax.

First of all, the date you pay any property tax, not the date it’s assessed or applied, determines when you can deduct it on your tax return. Pay by Dec. 31 and you can make a deduction on your 2018 tax return.

But if you know you’ll owe more income tax next year, due to increased income or selling assets, then paying in January allows you to take the deduction on your 2019 return, offsetting an otherwise increased tax hit. The converse is also true: if you expect your income to be higher this year than in 2019, paying by Dec. 31 will likely garner a bigger tax break.

It’s even possible to hold one year’s tax payment for January and then pay the next year’s in December, creating a tax year with a double deduction. But although this is still allowed, changes to this year’s tax law make that work for fewer people.

That’s because the IRS now caps the annual deduction for property taxes plus state income taxes at $10,000. If your area has high property taxes or state income taxes, the new limit won’t accommodate deducting two years’ tax bills at once.

Most homeowners with steady tax scenarios are best served by simply sticking to the same payment schedule every year. But a bit of forecasting can help determine if December or January is your better bet.

How the property you're buying affects your mortgage rate

By Sabrina Karl

When comparing mortgage rates, the rate tables you’ll first encounter may not be the right rates for you. That’s because lenders charge different rates for different property types. So what you’re buying makes a difference.

The typically advertised mortgage is for a single-family detached home in which you’ll reside. But what if you’re buying a townhome, a condo or a duplex? Or a vacation home or rental property?

Each property type carries different rates from a lender, as historical buyers of each type have different default rates. Buyers of a single-family detached home that will be their primary residence default the least often, so lenders charge the lowest rates for these properties.

Beyond this, two parameters affect your rate: whether you’ll personally live in the home, and the type of property you’re buying. If you’ll live in the home yourself, whether a primary, second or vacation home, you’ll fare better rate-wise than if others will live in the home. Conversely, rental properties have higher default rates – and thus higher rates – since landlords are more likely than homeowners to walk away from a property.

Then there’s dwelling type. Condos carry more risk for lenders, in part because the buyer won’t own the land and is subject to the condo association handling many aspects of the property. So condo mortgage rates are typically higher than single-family rates.

Townhomes and duplexes are hybrids of sorts, with their mortgage pricing depending on the lender. For instance, whether the townhome is attached, semi-attached or detached may have a bearing, as will a duplex’s owner-occupied or full-rental status.

Specifying your property type is critical to effective mortgage rate shopping, so if you’re buying something other than a single-family primary residence, know that you’ll need to dig deeper than pre-published rates.