Home buyers should be aware of the interest rate on the principal loan amount and the annual percentage rate that represents the total cost of borrowing.
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Unfortunately, when you get a home loan, you pay for more than just the interest rate each month. This is because there are other fees and charges involved in the mortgage process. The APR (annual percentage rate) of the loan reflects these charges, and is a broader measure of the cost of borrowing money to purchase a home.
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Pronounced the same as pity, the acronym PITI is a common term when dealing with home loans. The letters in PITI stand for principal, interest, taxes, and insurance. The term, however is typically used as a blanket term that covers the monthly sum of the total debt service (principal and interest), homeowners insurance, property taxes, mortgage insurance, and homeowners association fees.
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Balloon loans are usually short-term and only a small portion of the principal will be paid by the end of the term. They look something like this, a $400,000 loan is to be amortized over 30 years but due in 5 years. The borrower will make payments like they are on a 30-year amortized payment plan, but the loan will be due in 5 years. The amortized payments will pay for mostly interest and a small portion of the principle, the balloon payment is likely to be close to the principal.
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