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Understanding Indiana Mortgage, Escrow & Additional Costs
Understanding Mortgage, Escrow & Additional Costs: PITI, Principal, Interest, Taxes, Homeowners Insurance, Private Mortgage Insurance, Title Insurance
VIP Realty can help find the right home for you, and the financing you need to make the purchase, in Central Indiana. Besides a basic mortgage, getting into a home will usually take some upfront money, the amount of which can vary depending on your financing decisions, as discussed in Understanding the Numbers.
It is also important to understand the basic elements of a typical mortgage, as well as the escrow process for the timely payment of certain fees
Understanding Indiana Mortgages and Escrow
The total cost of a mortgage has four elements, known it the financial world as PITI:
- Principal - represents the amount you borrow, which has to be repaid over time
- Interest - the cost to the lender during your repayment schedule
- Taxes - fees charged by local governments to pay for local services. Property tax rates can vary widely by location and can affect your total cost and increase payments beyond your limitations
- (Homeowners) Insurance - required to cover the loan value in the event of a disaster such as fire, earthquake, flood, etc. (note: not all of these events are covered by standard homeowners insurance. Consult an insurance agent to determine all required coverage)
Many times buyers ignore the additional costs when figuring how much of a home they can afford. PITI is part of the formula that lenders use when calculating your affordability ratios. Your total monthly payment will include payments for:
In most cases, mortgages are automatically set to collect these fees by adding the amount you need to pay for taxes and insurance each month to your mortgage payment. These fees are then placed into an escrow account that the lender manages and uses to pay the fees on your behalf when they come due.
If your mortgage isn't set up with an escrow account, you will need to pay your taxes and insurance yourself and be able to provide proof of payment to your lender.
Local Property Taxes in Indiana
Your county and city may levy taxes on your property. These taxes pay for government services such as schools, roads, police, and other community services. The annual tax is usually calculated as a percentage (factor) of your property's appraised market value.
- You can contact your local community and county officials to determine your county and city tax factor.
- Many of these local real estate taxes may qualify for tax deductions. Check with your tax advisor for more information.
- At your home closing, you will be required to prepay up to one year's cost of your property tax.
- Then each month, your loan payment will include 1/12 of the annual property tax that will be deposited in your escrow account until the property tax payment is due.
Indiana Homeowners Insurance
You may be required to carry hazardous insurance on your Indiana home in the event of a fire, flood, disaster, and any other natural disaster that destroys or partially destroys your home.
The insurance will protect your investment (and the lender's) and repair any damage that may occur. The annual premium may vary depending on your home area and location. You must provide proof of insurance before closing and settlement.
- At your closing, you may be required to prepay up to one year's cost of hazardous insurance.
- Then each month your loan payment will include 1/12 of the annual hazard insurance premium to be deposited in your escrow account until payment is due.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is mortgage default insurance that is required for all conventional mortgage loans with less than a 20% down payment. It is designed to pay the lender a portion of the outstanding balance of a loan in the event the homeowner defaults.
If PMI is required as part of your loan, the initial annual premium will be included in your closing costs while your subsequent premiums (1/12th of your annual premium) will be included in your monthly mortgage payments and deposited in your escrow account.
You will need to check with your lender to estimate your cost percentage for PMI if your down payment is less than 20%. Nationally, the average annual percentage is around 0.005 of your loan balance.
In addition to these insurance programs, buyers will need to purchase Title Insurance to protect their lenders, and themselves, against any future claims on the property. For more information, read the section About Title Insurance.
Now that you have an idea of how much you can afford for your new home, the next step is to choose a neighborhood to live in and the type of home you want to live in. You can find more information on the subject at What to Buy & Where to Live.
For more information about how VIP Realty can help you buy a home in Central Indiana, call Tammy Bookout at (317) 345 - 8269 or toll-free at 888-VIP-0002 (888-847-0002), or send Tammy an e-mail, or submit the Request for Information form below.