Budget Mortgage Lending Practice
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