The Essential Components of the Mortgage Loan

"Once you're a homeowner, your house will probably be the biggest, long-term investment you have. Every dollar you spend on a mortgage or down payment is like putting money in a house-sized piggy bank, so it makes sense to look at home buying through the lens of saving." - Rachel Cruze

Are you interested in purchasing a new home? If so, are you able to pay cash for the property? Or do you need to apply for a loan from a Seattle mortgage broker to fund your purchase?

As the quotation mentioned above by Rachel Cruze notes: Your home will more than likely be the most substantial, long-term investment that you will ever make. Secondly, different mortgage brokers, or financial institutions, offer different home loan packages to suit a wide range of their potential client profiles.

Therefore, it is logical to assume that it is worth doing the necessary research, and taking extra care, to ensure that you apply for the right mortgage that suits your unique requirements.

The quintessential home loan components

The next question to ask is: Does a home loan comprise of more than one component? Or is it just an application form that you fill in and submit your financial statements as evidence proving your affordability statistics?

According to the Penn State Financial Literacy Series, a mortgage loan consists of four basic elements: The principal loan amount, interest on the principal, property taxes, and insurances.

Furthermore, there are additional elements added to the mortgage application, like the Good Faith Estimate, that are designed to help you determine which loan is best suited to your requirements.

Thus, by way of expanding on this succinct explanation, let's take an in-depth look at a few of the primary home loan components to ensure a comprehensive understanding of the mortgage loan application process.

The principle loan amount

This is the percentage of the cost of the property that you intend purchasing. It is typically between eighty and ninety-five percent of the total purchase price. Most mortgage brokers expect potential clients to put down a cash deposit to secure the loan.

As you can see, the cash deposit is typically between 5 and twenty percent. And, the principal loan amount is the core amount that needs to be paid back over the loan's lifespan.

Property taxes

The property tax is essentially the percentage of the assessed value of the property that needs to be paid to your local government organisation that manages property taxes. This figure is different depending on your home's locale. And, it is typically paid for the length of time that you are the homeowner, not for the loan's lifespan.

Interest

Essentially, the interest component of the mortgage loan can be seen as the "cost of the loan." Interest percentages or amounts differ based on the following elements:

The total principle figure borrowed.
The creditworthiness of the borrower.

Furthermore, the following points are worth being cognisant of:

The higher the borrower's credit score, the lower the interest rate as the credit score is translated into the risk that the loan will not be repaid within the specified time frame.
The interest rate is usually calculated based on the compound interest algorithm. In other words, the greater the loan amount the greater the interest figure and vice versa. Therefore, to reduce the overall cost of the loan, it is worth trying to pay more than the minimum monthly repayment rate as this will reduce the overall interest amount.
Interest amounts can work out to three times the total loan amount over the life span of the loan.

Insurances

The mortgage lender will insist that the borrower takes out at least one of the two following insurance types:

Homeowner's insurance: This is the standard and minimum requirement for the successful granting of a home loan. It is the financial institution's guarantee that it will not lose any money should the property and buildings be destroyed by a natural disaster like fire, earthquake, or hurricane-like storm.

Private mortgage insurance: This insurance is considered an additional extra. Succinctly stated, its aim is to protect the lender in the event that the borrower is unable to meet the monthly repayment figures.

Final thoughts

The body of this content provides nothing more than an overview of the essential components of a mortgage loan. Consequently, it is important for the home buyer, especially the first-time homebuyer, to do the necessary research to ensure that (s)he is granted the best mortgage with the minimum costs to ensure the speedy repayment of the loan.