After you have found your dream home and had an offer accepted you will work with your bank to figure out your loan, or mortgage.
This post is going to cover the parts of a mortgage, based on the assumption we are on a 30 year fixed-rate mortgage.
So, what's included in a mortgage? For that, most people use the anagram PITI but since we're focused in Chicago I like to use PITHI to cover all expenses.
P stands for PRINCIPAL, which is the sum of money that you borrowed. For instance, if you take a loan for $1,000 with 0% interest and pay $100 per month, each month, you are paying $100 worth of principal. It would take you 10 months to pay off this loan. Once the principal reaches $0 the mortgage has been fully paid off.
I stands for INTEREST, which is the premium you pay to the bank to borrow this money. Unfortunately, banks don't just give out money without making profit so we have to pay them more for the money. For example, if you take a $1,000 loan with a 5% interest rate the first month your payment will include $50 worth of interest to the bank. Each month, as the loan gets paid off, you will pay less interest and more principal. Once the loan is fully paid off, you won't pay any interest.
Your mortgage is what you owe to the bank for your loan so that only includes your principal and interest. This article is intended to educate you about all monthly expenses. While not technically your mortgage, the THI are additional monthly expenses that are the responsibility of the homeowner to pay.
T stands for TAXES, which is the money you pay to your city for the amenities it provides you. Each year, you will be given a tax bill, which is a percentage, usually 1-2%, of the price of your home. Depending on your situation you may pay your taxes to the bank or directly to the city itself. This monthly expense will never go away, so even when your loan is fully paid off, you will still have to pay taxes.
H stands for HOME OWNERS ASSOCIATION (HOA) fees, which are fees you pay for projects and amenities that your home owners association will provide you. HOA's are most common in condominium developments or neighborhoods with shared common elements. If you buy a home with an HOA you should expect to pay HOA dues for the duration that you own the home.
I stands for INSURANCE. Banks and most HOA's require you to hold homeowners insurance. Each year you will pay an insurance cost that is broken into monthly payments. If anything does happen you can file a claim and get reimbursed for your losses. This expense will never go away.
PITI, or PITHI, will account for what makes up your monthly expense payments. If you have any questions, feel free to comment on this blog or email me at firstname.lastname@example.org.
Your Chicago REALTOR