Mortgages
How a mortgage payment is constructed, what lenders test for, and where the negotiable money actually sits.
What the payment is made of
A mortgage payment combines principal, interest, property tax, insurance and often private mortgage insurance and homeowner association dues. Quoted rates cover only principal and interest, which is why the real payment commonly runs twenty to thirty percent above the figure in an advertisement.
Why early payments are almost all interest
Interest is charged on the outstanding balance, which is largest at the start. On a thirty-year loan, the first years therefore repay very little principal. The curve steepens over time, and any extra payment applied to principal permanently removes all the future interest that balance would have generated.
How lenders decide what you can borrow
Underwriting tests two ratios: housing costs against gross income, traditionally around twenty-eight percent, and total debt against gross income, traditionally thirty-six percent with programme exceptions. Whichever binds first sets the budget. Because the test uses gross income while you repay from net, the approved number is usually above the comfortable one.
Loan-to-value and mortgage insurance
A down payment below twenty percent generally triggers private mortgage insurance, which protects the lender while you pay for it. It can normally be removed once the balance falls far enough against the original value, and tracking that date is worth real money.
Where closing costs are negotiable
The Loan Estimate separates lender charges, services you cannot shop for, and services you can. Origination charges are arguable. Services you may shop — title in particular — often save more than negotiating the rate. Government recording and transfer taxes are fixed. Comparing quotes gathered on different days compares nothing, because rates move daily.
Refinancing and term choice
A refinance pays back when the monthly saving clears the closing costs within the time you will actually keep the property. A shorter term costs more monthly and dramatically less overall; a longer term buys flexibility that only pays off if the difference is genuinely invested or needed.
Common questions
Should I pay points?
Only if you will hold the loan long enough to recover the up-front cost. Divide the cost by the monthly saving to get the break-even in months.
Does a bigger down payment always win?
It lowers the payment and can remove mortgage insurance, but draining reserves to reach twenty percent leaves nothing for the first year of ownership.