Out of all of the factors that go into purchasing your first home, being prepared for and fully understanding the costs of home ownership may be the most important. While setting a budget and saving for your down payment are important initial steps to take, learning the major factors that go into your monthly payment can help you determine how much you really can afford.
Almost everyone who purchases a home needs a mortgage loan. Depending on size and term of the loan, there are 4 main factors that make up your monthly housing payment: principal, interest, taxes, and insurance costs or P.I.T.I.
Understanding principal and interest is the first step of the P.I.T.I mortgage payment process. While the principal portion of your payment will be dedicated to paying back what you have borrowed in total, the interest portion will be dedicated to rewarding the lender for taking the risk of loaning money to you, the borrower. Using a mortgage calculator may be a helpful tool in helping you get an idea of what your monthly principal and interest payments will look like.
Property taxes, which are calculated through the government and assessed on a yearly basis, may also be factored into your monthly payment. According to HGTV, after interest costs, property taxes can be the second greatest expense of home ownership. While property tax rates vary depending on state laws location, paying your portion of these taxes monthly will keep you from owing a large sum of money at the end of each year.
Insurance costs are also important to consider in your monthly budget. Insurance is not only required when purchasing a home, it is must to protect your home from the inevitable disaster. Along with property insurance, PMI or private mortgage insurance is required by most lenders in order to protect the lender in the event that the borrower cannot repay their debt.
While other factors like location, neighborhood, and home inspections are also important to consider when buying a home, the financials: budgeting and preparing yourself for monthly payments is critical. Contact your mortgage professional today for more information.