Are you looking to buy a home? Do you know how much you can afford to pay each month for a mortgage payment? Did you know that your mortgage payment includes more than just the amount you’re financing for your mortgage loan?
There are actually 4 elements that make up your monthly mortgage payment. These elements are called PITI.
- Principal – the amount of your payment that goes toward repaying the principal of your loan, in other words, the dollar amount you borrowed for your loan.
- Interest – the amount of your payment that goes toward repaying the interest on your loan. The interest is the amount you are charged for borrowing the money to buy your home. Interest rates can change daily based on how well the economy is doing.
- Taxes – the amount of your payment that goes into your escrow account to pay your property taxes. When you’re buying a home, the seller may list the amount of taxes owed annually on the property. Or, you can get this information from the local property tax assessor’s office. To determine what you will owe monthly for your taxes, divide the annual amount by 12. This monthly amount is what will be added to your monthly mortgage payment to cover your tax payment. When your taxes are due, your lender will pay them for you from the funds they have collected in your escrow account. However, it’s important you understand that your property taxes can go up (or down) over the years.
- Insurance – the amount of your payment that goes toward paying your homeowner’s insurance. It’s important that you carry property insurance on your home to protect yourself in case of loss. It’s best that you insure your home based on its replacement value – the cost to rebuild your exact home. Several factors go into determining the cost of your premiums, such as the age of the home, the size, the materials used in construction (i.e., brick, wood, concrete) and where it is located. Once you receive the annual amount for your homeowner’s insurance from your insurance agent, divide the amount by 12 to determine how much this will increase your monthly mortgage payment. Like your taxes, your insurance premiums can change over time, too – usually by going up.
Another factor beyond PITI which may play a role into determining if you can afford a certain home is the homeowners’ association dues. These are annual or monthly fees that the housing community requires you to pay to cover shared community costs, such as lawn care, street lighting, or maintenance on community amenities like a swimming pool, clubhouse or playground.
Obviously, it’s important to consider all four elements – Principal, Interest, Taxes and Insurance (and homeowners’ association dues) – when determining how much you can afford for a home.
If you looking to buy a new home, Grandview Lending can help you find the right mortgage loan for your needs. Contact us today!