Mortgage Lending
Practices...
The budget
mortgage takes the
amortized loan one
step further. In
addition to
collecting the
monthly principal
and interest payment
(often called P +
I), the lender
collects one-twelfth
of the estimated
cost of the annual
property taxes and
hazard insurance on
the mortgaged
property. The money
for tax and
insurance payments
is placed in an
escrow account (also
called an impound or
reserve account).
When taxes and
insurance payments
are due, the lender
pays them. Thus, the
lender makes certain
that the value of
the pledged property
will not be
undermined by unpaid
property taxes or by
uninsured fire or
weather damage. This
form of mortgage
also helps the
borrower to budget
for property taxes
and insurance on a
monthly basis. To
illustrate, if
insurance is $240
per year and
property taxes are
$1800 per year, the
lender collects an
additional $20 and
$150 each month
along with the
regular principal
and interest
payments. This
combined principal,
interest, taxes, and
insurance payment is
often referred to as
a PITI
payment.
Budget
Mortgage To Balloon
Loan
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