The first step that every future homebuyer must take is budget calculation. Your home may be the biggest purchase you’ll ever make, so it’s important that you enter the homebuying journey with a solid understanding of your finances.
Calculating your budget for a home purchase can be highly complex, especially for the first-time homebuyer. Here are some common financial terminology questions for newbies to the real estate market may have:
What is PITI?
When you make your monthly mortgage payments, you’ll be paying more than just the principal. You’ll be paying PITI:
Principal is the amount you borrowed. If you purchased a $100,000 home and made a $20,000 down payment, your principal is $80,000.
Interest refers to the interest rate as assigned by your lender. This determines how much extra you’ll pay for the loan. The faster you pay down your mortgage, the less you’ll pay in interest.
Taxes typically refer to property taxes. In some areas, you pay property taxes to the local tax assessor’s office, but many times, mortgage lenders will collect these payments. In this case, your payment will go into escrow, and the lender will move the money toward your tax payments.
Insurance can be homeowners insurance, mortgage insurance, or both. In the case of homeowners insurance, the mortgage lender may collect the amount owed and make the payment on your behalf, much like property taxes. Lenders like to ensure payments like these are being made, which is why they are often included in PITI.
What is LTV?
LTV stands for loan-to-value ratio. This is a measure of the size of a loan as compared to the value of the property purchased using that loan. If you purchase a $100,000 home with a $20,000 down payment, your LTV is 80 percent.
Generally, the highest LTV creditors will loan without requiring the borrower buy private mortgage insurance is 80 percent. Private Mortgage Insurance, or PMI allows you to purchase a home with as little as 3% down.
What are origination charges?
Loan origination requires time, expertise and a good amount of work on the lender’s end. Mortgage origination begins when you, the customer, give your financial information to the lender, which might include your income, assets and credit report. Using all of the information you supply, the lender will determine your eligibility. This is calculated by an underwriter, who will carefully analyze your financial situation.
All of this work costs a fee – a loan origination fee. Confusingly enough, they’re typically not denoted as a dollar amount. Rather, loan origination fees cost points. One point is one percent of your loan. So, if you take out an $80,000 loan, one point is $800.
The typical loan origination fee is just one point, but this varies widely depending on the lender and circumstances.
Calculate your budget
There are a number of calculators online that will assist in helping you determine how much home you can afford. To get an idea of what your monthly payment would be if you know the loan amount you’re looking for, try this monthly payment calculator available along with other useful resources in our Mortgage Center.