May 11, 2016 - 09:45
There are a few things you need to know if you are thinking about buying a home soon. The obvious is to save for a down payment, budget and know the location. But these other suggestions will help you understand more on the financial side of buying a home and the costs that come along with it.
If you are renting, you already have an idea of the process of monthly payments but the difference with owning a home is that there will be a few more fees. Usually in renting, a single rental fee covers your monthly housing payment and sometimes utilities bill will be attached with that bill as well. But with owning a home there will always be four main factors that will go with your home monthly payments.
These are abbreviated as (P.I.T.I.) and understanding these costs will help you determine how much you can afford. What makes up most of the payments each month will be the principal and interest, with the principal paying down your loan balance each month and the interest paying your fee for borrowing the money. Interest rates will vary case-by-case depending on who the mortgage lender is but on average they will go around 3-4%. Taxes refer to property taxes, which are assessed by the county you live in. They average around 1% of your home’s value each year. For insurance, lenders require that your insurance cover the cost of rebuilding the home if any type of disaster ruins it. This is the replacements cost and it is determined by your insurer and approved by the lender. Depending on the type of insurance you get, it can cost anywhere from $700- $1,500 a year for a single family home.
Remember, mortgage interest and property taxes are deductible when you file your annual tax returns, and reduce taxable income. Lets put this into perspective, for a $300,000 home with 20 percent down and a 30-year fixed mortgage at 4 percent, monthly P.I.T.I. is about $1,545. Tax deductions reduce this total housing cost to about $1,215. But for some of us, we wont have 20% for a down payment, but we can obtain a down payment for as little as 3%. But for a low down payment you will have to also pay mortgage insurance, which is about .85% of your loan amount. So lets do a few numbers again, a $300,000 home with 3 percent down and a 30-year fixed mortgage at 4 percent will come to be about $1,995. After tax deductions, this total housing cost drops to about $1,614 and it will need a $9,000 down payment.
So usually the bigger the down payment the less you will be paying monthly (P.I.T.I.) for the home. Another suggestions is to work on your credit score. Credit scores are critical for getting the best mortgages with the lowest rates. Lenders want reliable on-time payment history as well as credit depth. In the end it is a good idea to have a good estimate on the total amount that you will be paying per month on the home, your (P.I.T.I) will vary so be sure to do your research on the area you are likely to buy in and talk to a lender so you could have a better idea before you make your big step.