Understanding the building-blocks of a mortgage may help you compare your options. Your monthly payment is based on a complex calculation that changes over time, so "getting the picture" can be tricky! The biggest pieces are: Loan Amount Interest Rate Term (years to pay off) Payment Schedule Down Payment Equity Down payment and equity are of course closely related, but remember that your equity changes as loan payoff proceeds. This short video visualizes the way these factors relate to help you make sense of the math.

The term "mortgage" is commonly used to refer to the loan someone obtains to buy a home or property. Technically, the loan is one part of the arrangement. The other — the mortgage itself — is a legal claim (a "lien") that gives the lender rights to the home or property used as security, until the loan is paid off. The loan component of the financial package has two key features you should understand. Principal — the amount you are borrowing. For the lender, risk is balanced by their lien on the property. Interest — the additional amount you are paying, over time, to borrow the principal. Because mortgage loans usually take years to pay off, understanding that interest is compounded — "interest on interest" — will help you make sense of the total cost of the home. For fun — the roots of the word "mortgage" are death (mort) and pledge (gage). It captures the long-term promises involved in buying a home.

Home mortgages are for completed homes, not construction projects. But construction projects may become completed homes, so there is a loan structure designed to cover construction, and convert to a mortgage at the appropriate point. These are commonly called "construction perm" loans. Loan terms during construction are frequently based on variable rates, and provide scheduled cash disbursements — "draws" — to match the stages of construction. When the home is legally complete-enough to qualify for a Certificate of Occupancy (CO), the loan is converted to a mortgage. Construction perm loans have the advantage of a single application and closing, and dealing with a single lender. If you are considering a construction perm loan, compare interest-rate trends to your construction schedule. Assume construction delays. Evaluate if a rate-lock on the mortgage stage looks advantageous. In addition, weigh the short-term cost of the construction-perm arrangement against your mortgage rate and its long-term costs.

You may see or hear the term "punch list" in the process of buying a new home. Heres what it means. When a project is nearly done — "substantially complete" — a pre-final inspection is customary. The list of final things to be done (or checked) is called the "punch list" in the US, and the "snag list" in some countries. These tasks include things like security-system activation and elevator permitting, as well as minor/final repairs such as fixing wall cracks, trim or windows. Organization by type-of-subcontractor is common; all carpentry items together, all electrical, all plumbing, and so on. Critically, completion of the punch list can be required before final payment. Calling sub-contractors back afterwards, on the homeowners nickel, is obviously less desirable. In short, assuming the contract allows it, do not close escrow until the punch list is complete, or until you are satisfied with how items have been addressed.

Lending institutions consider your full financial situation in calibrating acceptable loan structure and size. Some of the key factors that will come into play: DTI — Debt to Income — compares your pre-tax (gross) income to your expenses and commitments. Non-housing expenses and commitments, especially long-term debts such as car loans, student loans, child support and alimony. Do you have the cash available for down payment and closing? What is the source of the cash? What is your credit rating? Are there any outstanding or concerning issues in your credit history? The Federal Housing Authority sets general guidelines about these ratios, which lenders will consider. These ratios may be adjusted up or down slightly over time. In the past few years, FHA guidance has recommended that monthly mortgage payments not exceed about 1/3 of gross income. Overall expense-ratio recommendations have been between 40% and 43%. All of these factors will be considered and verified in determining qualifying loan amounts.

Lenders provide a Loan Estimate form within 3 business days of application for an approved loan. This form documents the terms, projected payment, costs and other details. These definitions may be helpful in interpretation: Loan Amount: total dollars borrowed, which is not the same as total borrowing cost. Interest Rate: cost you will pay each year to borrow, converted to a percentage rate. Not quite the same thing as: APR (Annual Percentage Rate): this includes interest rate, points (if used), mortgage broker fees, and other charges you pay to get the loan. Monthly Principal & Interest: payment amounts that go to reducing loan principal, and to paying interest, each month. (Mortgage insurance and escrow payments are not included here.) Projected Payments: approximate payment amounts over the years, with the major components such as principal, interest, mortgage insurance, escrow and assessment broken out. Estimated Closing Costs: specific costs to close, detailed. These are directly loan-related costs. Estimated Cash to Close: sum of estimate, plus any other known costs, to provide the total cash needed at loan close.