If you’re considering buying a home, you’ve probably done some research on home prices and how much mortgage you can afford. This is a common first step. Generally, folks like to kick off the process by looking at home prices in their neighborhood of choice. And while it’s fine to scan Zillow for the perfect A-frame in your favorite area, shopping around doesn’t actually help you figure out what you can afford.
First-time home buyers can be bamboozled by the true cost of buying a home, because there’s a lot more to consider than just principal and interest. Before buying a home, you should crunch and become familiar with the numbers for the total cost of your mortgage, including insurance, taxes, fees, bills, furniture, and so on. Only with a good grasp of what each line item will run can you make an estimate about the size of the mortgage, and therefore the home you can afford to buy.
Post-Redfin dreamin’, your next step is to determine how much you are willing to spend each month on all housing costs—without even knowing what those might be. Your total housing costs, ideally, should be no more than 28% of your total gross pay (before taxes). So where does 28% put you? Let’s find out by calculating your total mortgage costs.
Calculate Your Total Mortgage Cost
If you have been looking at homes, you’ve probably plugged your information into a mortgage calculator at some point. This is a fine place to start, but as mentioned, this number is far from all-inclusive. Still, it’s good to be familiar with the tool.
With any mortgage calculator, you will be asked to input hypotheticals, like the cost of your future home, your down payment, and the interest rate on your home loan. You’ll also need to choose which type of loan you plan to take out; It will likely be a 30-year fixed-rate mortgage.
Using your hypotheticals, the calculator will tell you what you’re likely to pay each month. It should also provide the breakdown between what is paid to interest versus what goes toward the principal. An amortization graph shows how payments shift from being very interest-heavy at the beginning to covering mostly principal toward the end of your loan.
Factoring Insurance and Taxes Into Your Mortgage
Have you heard of the acronym PITI? It stands for principal, interest, taxes, and insurance. It’s is often pronounced “pity” and is therefore used endlessly in corny jokes by folks in the finance biz. Anyway, the PITI acronym includes the four major costs that every homeowner must pay. With our mortgage calculator, we determined the “P” and “I” of PITI. Next, let’s consider the “T” and second “I.”
Property taxes are determined by your state and county, and they are based on the assessed value of your home and land. Generally, property taxes are paid to your city, county, and local school board. Because each county has their own methods for calculating and assessing property taxes, you’ll have to check with a realtor or look online at the county’s website to get a better idea of what they might run you. To help your calculations, 1% is a rough national average for property taxes. That means you’d probably pay $5,000 in annual property tax on a $500,000 home.
Homeowner’s insurance depends on several factors like the value and condition of the property, and how much coverage you need. For example, a home in a state with a history of tornadoes or hurricanes will likely charge more than a state that’s less prone to such natural disasters.
As with property taxes, homeowner’s insurance may be collected by your lender and deposited into your escrow account, and other times you take care of the bill on your own. (You’ll want to ask your lender to be sure.) The national average for homeowner’s insurance in 2016 was $1,083 per year, or $90 per month.
Keeping Track of All Other Mortgage Fees
Private Mortgage Insurance:
If you put less than 20% toward your down payment, you may have to pay Private Mortgage Insurance. Why? Essentially, borrowers who put down less than 20% are considered a slightly higher risk because they do not have as much equity in the house.
The cost of PMI is usually determined by your credit score, the percent of your down payment and the amount of coverage required by your lender. Your lender will be able to provide you with an estimate. In general, you can expect your monthly PMI payments to run from $25 to $75 per $100,000 you borrow. The Homeowners Protection Act requires that lenders cancel your PMI when your loan-to-value ratio reaches 78%.
Homeowner’s Association fees are charged by condominiums, townhouses, and other shared-community developments, and are used to maintain common areas, provide security, manage amenities, and enforce HOA rules. HOA fees can vary depending on a number of factors, so it’s important to educate yourself on the costs and coverage before buying a property. The HOA for a single-family home in a closed neighborhood might run $50 per month, but a villa in an upscale ski town could cost $1,500 per month.
Don’t forget your monthly bills. For utilities, research what similar-sized homes in the area are spending on energy, garbage, water. Factor in cable, Wi-Fi, and any other utilities you’re accustomed to.
Though not a monthly fee, you’ll also want to be prepared to cover closing costs, which may include loan origination fees, appraisal fees, title insurance , taxes, deed-recording fees, and other charges.
Closing costs can run anywhere from 1% to 5% of the value of the mortgage loan, and can be paid by either the buyer or the seller. And remember, it is always, always recommended that potential homebuyers build up a significant emergency fund for repairs. When you’re a homeowner, there’s no one else to come and deal with rusty pipes or broken heaters!
Are You Ready to Afford a Mortgage?
Feeling overwhelmed by all the expenses we just laid out? The good news is there are ways to save money on these costs: You can and should shop around for homeowner’s insurance rates. Improving your credit score will get you a better interest rate on your home loan, which could save you thousands. Not all lenders are created equal, and you should get quotes from several financial institutions before deciding who you want to work with.
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