When considering how much of a mortgage payment you can afford, be sure to consider all four parts of your total monthly amount, not just the amount that you’ll be borrowing. This four-part payment is referred to as PITI – Principal, Interest, Taxes and Insurance.
PRINCIPAL
This is the amount applied to the loan, which pays down the balance due.
INTEREST
Currently quite low, this percentage changes according to the economy. Based on the designated percentage rate, this is the cost charged for borrowing money.
TAXES
Once you learn what your property taxes will be, divide the number by 12. That will tell you how much you’ll be adding to your monthly payment.
INSURANCE
It’s best to insure your home for replacement value so you’ll know if you have a total loss, you’ll be able to rebuild the exact home again. Factors that determine the premiums can include the age of your home, where it’s located (one issue is proximity to a fire station), materials used (brick or wood) and the size. The annual amount, divided by 12, will tell how much this will increase your monthly mortgage payment.
HOMEOWNERS ASSOCIATION DUES
Often your HOA bill is added to your escrow. If your Association annual fee is $600 per year, that will add $50 to your monthly house payment.
Obviously, it’s important to take all four – Principal, Interest, Taxes and Insurance – into consideration when determining how of a house you can afford.
