Real Estate Financing Basics

A mortgage is a loan used to purchase or refinance real estate. You borrow money from a lender to buy the property, then repay the loan � plus interest � over a set period of time (typically 15 or 30 years). The property itself serves as collateral, meaning the lender can foreclose if you fail to make payments.

Mortgages consist of four main components often referred to by the acronym PITI:

• Principal � the amount you borrowed
• Interest � the cost of borrowing money
• Taxes � property taxes (often collected monthly and held in escrow)
• Insurance � homeowners insurance (and sometimes PMI)

Your interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. Even a fraction of a percent can mean thousands of dollars over the life of a loan.

The Annual Percentage Rate (APR) is broader � it includes the interest rate plus lender fees, giving you a more complete picture of the loan's true cost.

Factors that affect your rate:

• Credit score (higher score = lower rate)
• Down payment (larger down = lower rate)
• Loan type (conventional, FHA, VA, etc.)
• Loan term (15-year rates are lower than 30-year)
• Market conditions (rates move with the economy)

Pre-qualification is an informal estimate of how much you may be able to borrow based on information you self-report. It doesn't require a credit check and gives you a ballpark figure to start your home search.

Pre-approval is more rigorous. The lender verifies your income, assets, and credit history to provide a conditional commitment to lend up to a specific amount. A pre-approval letter shows sellers you're a serious, qualified buyer.

In a competitive market, a pre-approval can make the difference between winning and losing a home.

PMI is required on conventional loans when the borrower puts less than 20% down. It protects the lender � not the borrower � in case of default. PMI typically costs 0.5�1.5% of the loan amount annually, added to your monthly payment.

The good news: PMI is not permanent. You can request removal once your loan-to-value (LTV) ratio reaches 80%, and it's automatically cancelled at 78% LTV under the Homeowners Protection Act.

FHA loans have their own version called Mortgage Insurance Premium (MIP), which has different rules. VA loans have no mortgage insurance at all.

The down payment is the upfront cash you contribute toward the purchase. A larger down payment means a smaller loan, lower monthly payments, and often a better interest rate.

Common down payment requirements:

• VA Loans: 0% down
• USDA Loans: 0% down
• FHA Loans: 3.5% down (580+ credit score)
• Conventional: 3�5% down for first-time buyers; 20% avoids PMI

Down payment assistance programs are available in Florida through the Florida Housing Finance Corporation and various county/city programs. Ask us what you may qualify for.

Closing costs are fees paid at settlement, on top of the down payment. They typically run 2�5% of the loan amount and include:

• Lender origination fees
• Appraisal fee ($400�$600)
• Title search & insurance
• Attorney or settlement fees
• Recording fees
• Prepaid items: homeowners insurance, property taxes, prepaid interest

You'll receive a Loan Estimate within 3 business days of application and a Closing Disclosure 3 days before closing � both detail every cost so there are no surprises.

Tip: Closing costs can sometimes be negotiated. Sellers can pay up to a certain percentage of costs, or you can accept a slightly higher rate in exchange for a lender credit.

Fixed-rate mortgages keep the same interest rate for the entire loan term. Your principal and interest payment never changes, making budgeting simple and predictable. Most buyers choose a 30-year or 15-year fixed.

Adjustable-rate mortgages (ARMs) start with a fixed rate for an initial period (commonly 5, 7, or 10 years), then adjust annually based on a market index. ARMs typically start with lower rates than fixed loans.

When to consider an ARM:

• You plan to sell or refinance before the adjustment period
• You're disciplined about saving the payment difference
• Current ARM rates are significantly below fixed rates

Most lenders require an escrow account to collect and pay property taxes and homeowners insurance on your behalf. Each month, a portion of your payment goes into the escrow account. When taxes and insurance are due, the lender pays them from this account.

This protects the lender's collateral � your home � by ensuring these bills are always paid. It also makes budgeting easier by spreading large annual payments into monthly amounts.

At the end of each year, your lender sends an escrow analysis. If there's a shortage, your payment will increase slightly. If there's a surplus, you'll receive a refund.

An appraisal is an independent, professional estimate of a property's market value. Your lender requires one to ensure the property is worth the amount being borrowed.

The appraiser inspects the home and compares it to recent sales of similar properties (comparable sales or "comps") to determine value. If the home appraises at or above the purchase price, the loan proceeds normally.

If the home appraises below the purchase price (a "low appraisal"), you have options:

• Negotiate a lower price with the seller
• Pay the difference in cash
• Challenge the appraisal with additional comps
• Walk away (if your contract has an appraisal contingency)