Principal — The principal is simply the sum of money borrowed to buy the home. Put another way, the principal is the price of the home minus the down payment provided by the buyer. Interest — Usually expressed as a percentage called the interest rate, interest is what the lender charges the buyer to use the money borrowed. As well as the given rate, the lender could also charge points and additional loan costs
Principal and interest comprise the bulk of the monthly payments in a process called amortization. Amortization reduces the debt over a fixed period of time. With amortization, the monthly payments are largely interest during the early years and principal later.
In addition to principal and interest, a mortgage payment could include money deposited in an escrow or trust account to pay certain taxes and insurance. Taxes — The taxes are property taxes each community levies. The amount of property tax varies from community to community, but the amount is based on a percentage of the value of the home. The tax is generally used to help finance benefits and needs of the community, such as to build schools, roads, infrastructure and a multitude of other needs. Property taxes are paid even by those who do not need an escrow account and continue to be paid after the mortgage is paid off. 

Insurance — Lenders won’t close the deal on a home purchase to borrowers who haven’t secured home insurance. Home insurance covers the home and the buyer’s personal property against losses from fire, theft, bad weather and other causes. Flood Insurance If the home is in a federally designated high flood risk zone within a flood plain and the borrower is signing for a federally insured loan, federal law mandates that the borrower must buy flood insurance.
For those who put less than 20 percent down on a home purchase, most lenders will also charge for private mortgage insurance (PMI) premiums. The coverage doesn’t protect the buyer. It protects the lender in the event that the buyer defaults on the mortgage. Without the coverage, many buyers could not otherwise afford to buy a home. For loans written on or after July 29, 1999, lenders must automatically cancel PMI when the mortgage balance shrinks to 78% of the homes current value…Please note FHA requires 5 years + 78% in ordered for it to be removed. 

Generally, if the buyer places less than 20% of the value of the home as a down payment, the lender considers the to be loan riskier than those with larger down payments. Many consumers choose an 80/20  where 80% of the required money is financed on one loan and 20% on a secondary loan which also resolves the mortgage insurance requirement for any loan financed over 80% of the initial purchased price paid. Seller Concession — Many first time buyers with limited funds seek the seller’s assistance with closing costs. This is especially true for those securing FHA loans. Typically on an FHA loan the borrower must contribute 3% of his/her own funds into the loan, this can be a gift from a family member and does not necessarily need to be applied to the down payment, it may be applied towards closing costs or pre-paid items. The typical seller’s concession on an FHA loan is 6% , however on a conventional loan with less than 10% down the seller concession in most cases is no more than 3%. Other factors such as credit scores and loan program guidelines would determine the exact amount allowed.
Mortgage Defined
A mortgage is a loan to finance the purchase of a home. The house serves as collateral for the loan, which is issued under a contract signed by the buyer, agreeing that the buyer will pay the debt, with interest and other costs, over a designated period of time.
 If the buyer doesn’t pay the debt, the lender has the right to take back the property and sell it to cover the debt. To repay the debt, the buyer makes monthly installments or payments that typically include the principal, interest, taxes and insurance, together known as PITI. 

Fixed Rate
In the past, mortgages were offered in one flavor, the 30-year fixed rate mortgage. This choice is still a good one for many people. Fixed rate loans ensure that the amount of the monthly payment stays the same for the life of the loan. Some lenders now offer 15, 20, 25 or even 40-year terms. A 15-year fixed rate mortgage is worth investigating. It rings in at a higher monthly payment but has the benefit of paying a much lower amount of interest over the long haul. A 30-year fixed rate mortgage also allows homeowners to pay off their home before retirement or before the kids go to college.Adjustable Rate
Adjustable Rate Mortgages (ARMs) were developed during a time when many people could not realize the dream of owning a home because interest rates were prohibitive. An ARM is a loan agreement which starts out at a lower interest rate with a risk of increased interest rate in the future. Each ARM has four basic components:
 
·         Initial interest rate   
This is the rate that you pay until the end of the first adjustment interval. The initial interest rate of an ARM is typically one to three percentage points lower than that of most fixed rate mortgages. The initial interest rate is tied to certain economic indicators that dictate what the monthly payment will be. ·         Adjustment interval
The interest rate of an ARM changes at fixed intervals. This is called the adjustment interval. Different ARMs have different adjustment intervals. The interest rate of most ARMs adjust once a year, but others adjust every month, every six months, every three years or every five years. 

·         Index
An ARM’s interest rate goes up and down according to a nationally published index. The lender has no control over the index and cannot arbitrarily adjust the buyer’s rate. Since rate is determined this way by the index, it is somewhat a risk for the lender as well as the buyer. Rates could go either up or down. ·         Margin
The lender sets the ARM’s margin before settlement of the loan. Once set, the margin does not change for the life of the loan. An ARM’s interest rate is the sum of the index value plus the margin.
 
       Benefits to the ARM are: 

      1.   The lower initial interest rate make ARMs qualifying easier. If there is reason to believe that interest rates are going to decrease over time, the buyer would be the one to gain the benefits. 

 If the buyer plans to stay in a home for a short time, the lower initial interest rate can be a benefit. Consumers with credit issue who would like to repair there credit in a timely….. 

Processing and Underwriting
Processors gather documentation such as employment history, income, banking, and alike in order to prepare your total package. They also verify your package is in compliance with the lenders guidelines prior to submittal for
underwriting. Underwriters then validate information and make exceptions to rules while determining the credit risk for your particular file. Even though many options are available to prospective home buyers, no one need be daunted by the process. Whether FHA or conventional, fixed or adjustable rate mortgage, there are enough options out there that almost anyone can realize the dream of owning a home. The hardest part is now done. Now that the language of the mortgage business is understood, prospective home owners can approach their loan officer with a solid understanding of the tools of the trade.