Wednesday, November 13, 2013

Mortgage Terms 101



Defining PITI

When a mortgage lender is trying to determine your ability to repay, one area at which it looks is your total monthly housing payment.
Your total monthly housing is calculated as follows :
  • Your monthly mortgage principal payment
  • Your monthly mortgage interest payment
  • Your annual real estate tax bill, pro-rated to a monthly figure
  • Your annual homeowners insurance bill, pro-rated to a monthly figure
Collectively, these elements -- principal, interest, taxes, insurance -- are known as PITI. 
PITI is pronounced "pee-eye-tee-eye" and for rate-shopping home buyers, it can vary from day-to-day, and from home-to-home. This is because mortgage rates change daily, which change a home's principal + interest payment, and because every home's tax bill and insurance bill are different.
A home in storm-heavy Miami, Florida, for example, will typically cost more to insure than a home in Columbus, Ohio. The same is true for a home in the San Francisco Bay Area which may be more susceptible to natural disaster than a home in Denver, Colorado.
Similarly, homes in newly-built areas may require a higher tax bill as infrastructures get built, raising the monthly PITI as compared to homes in more mature neighborhoods. 
Many mortgage programs such as the FHA Streamline Refinance and various VA home loans require monthly pro-rated tax and insurance bills to be included within the monthly mortgage payment, a loan trait known as "escrowing" taxes and insurance. 

Find Your Monthly Escrow Payment

Escrows are a part of your mortgage payment and you'll want to know your obligation. It's best to use a calculator because, although the math is simple, you want to make sure you get it right.
First, find your home's real estate tax bill(s), noting that in some areas, you may receive statements from multiple different taxing authorities. Find the sum of these statements and add to it your annual hazard insurance premium.
If you are a home buyer and don't know what your hazard insurance premium will be, estimate 1% of the purchase price. This will yield an estimate which is likely larger than your actual premium, but when building a budget, it's often better to estimate on the high-side.
Next, divide your sum by the 12 months in a year.
As an example, a Bucks County, Pennsylvania home with a $8,400 annual tax bill and a $1,200 insurance policy will pay $9,600 annually. This yields $800 paid into escrow monthly as part of PITI.
These monies are paid along with the mortgage payment's principal + interest portion.

Some Homeowners Prefer To "Waive Escrows"

Not all mortgages will require a homeowner to escrow. Specifically, mortgages via Fannie Mae or Freddie Mac for which there is at least 20% equity will often allow self-management of a homeowner's annual tax and insurance obligations.
Asking to pay your own taxes and insurance is known as "waiving escrow".
Not surprisingly, mortgage servicer’s prefer that homeowner’s escrow for taxes and insurance. This is because when escrows are waived, it introduces two major lender risks:
  1. A home’s real estate taxes may go unpaid, go delinquent, and get sold to a third-party
  2. A home's insurance coverage may lapse, and major damage is somehow sustained
These two scenarios are avoidable for loans with escrows; when the full PITI is paid to the lender monthly.
For this reason, homeowners choosing to waive escrows may sometimes be denied access to the same low rates as their tax-and-insurance escrowing peers. The "fee" to waive escrows can raise your mortgage rate by as much as 0.25 percentage points.

Get Today's Rates With (And Without) Escrows

If you're planning to buy a home or refinance one, and aren't sure whether you'd like to escrow, consider the costs of both routes. Putting your tax and insurance bill in the hands of a lender gets your bills paid on-time, but restricts your access to those funds -- including the ability to earn interest on them.
However, if you choose to waive escrow and self-manage your bills, you may be subject to higher mortgage rates.
Note, though, that not all lenders charge an escrow waiver fee and you can't know until you ask. Jumbo lenders are most likely to allow the waiving of escrows without penalty.

To receive personalized rates please email me at eneal@athccorp.com with your available times to discuss your options.