When you are looking to buy a home, the payment you will make each month is a big concern. If it is too much, you need to be looking at a more affordable home, and if it is really low, then you could possibly afford a few more amenities with your new home. When looking to buy a home, you have to decide what you will not compromise on in a home, but what you realistically can afford. The right home will have a good blend of your wants and needs. Finding the right home for your budget takes planning, and discussion with your realtor and your lender. But what exactly goes into your monthly payment once you have found the home you want?
We will look at five components of a monthly payment: principle, interest, mortgage insurance, homeowner’s insurance, and property taxes.
Principle
Principle, along with interest, is the primary component of a mortgage payment. There are many, many factors that go into determining the amount of principle and interest. We highly recommend the use of a mortgage professional to help you in this step. A good mortgage officer will break down the numbers for you for all possible scenarios. He or she will visit with you about many things, but mainly they will focus on:
· Your future goals
· Whether you will be in the home long or short term
· Your cash flow
· If you prefer a lower payment and a longer loan period or a larger payment and shorter loan period
· Credit score
· Assets or cash reserves
· Debt levels
The mortgage officer also looks at the needs of your family (is a child going to be in college soon?), and the assets you have on hand to settle on the loan that will best suit your individual situation.
Principle is the actual amount that you borrow from a lender to purchase your home. As an example, suppose you were purchasing a $200,000 home in Twin Falls, and had $10,000 in cash available. The sellers are paying the closing costs for you. In this case, let’s say you used the $10,000 available as your down payment, which reduces the amount of your loan, or principle, to $190,000.
For the purposes of this example, let’s make the following assumptions:
· Purchase Price: $200,000
· Interest Rate: 5%
· Loan Terms: 30 Year Fixed Rate
· Down Payment: $10,000
· Seller paying closing costs.
· Loan Amount: $190,000
· Mortgage insurance: 0.5% of Loan Amount
· Homeowner’s insurance: 0.25% of Purchase Price
· Property taxes: 1.0% of Purchase Price
Based upon the above assumptions, let’s look at a basic amortization chart to visualize your principle and interest payments.
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Monthly Payment Breakdown
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Interest
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Principle
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Balance
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Monthly Principal and Interest:
$1,019.96
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February 2009
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$791.67
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$228.29
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$189,771.71
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March 2009
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$790.72
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$229.25
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$189,542.46
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Total Interest Paid:
$177,185.99
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April 2009……
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$789.76
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$230.20
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$189,312.26
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November 2038
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$12.64
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$1,007.32
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$2,027.24
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Total for 360 Payments:
$367,185.99
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December 2038
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$8.45
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$1,011.51
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$1,015.73
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January 2039
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$4.23
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$1,015.73
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$0.00
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Interest
Interest is how much the lender charges you for the use of their money, over the time period of your loan. The bank computes a daily interest rate. The outstanding principle is multiplied by the daily interest rate every day and accumulates for the entire month. Then, when you make your payment, the interest owed is paid first and the balance of your mortgage payment is then applied to reduce the principle amount. Amortization tables like the one above help illustrate this better, and if you would like to go over one in more depth, just call Lezamiz Real Estate Co. at 208-734-7007. It is important to realize that in the beginning, most of your payment pays your interest and a smaller balance reduces your principle. As time progress though, a larger portion will apply to the principle, and less will go to interest. One you lock in the terms of your loan, the interest rate charged and the principle and interest amounts you pay will always stay the same. Additional components that add to your payment are mortgage insurance, homeowner’s insurance, and property taxes, all of which we will look at next.
Mortgage Insurance
Mortgage insurance insures that the lender will collect the amount of funds they loaned to you in the event that you default, or stop making payments on your mortgage. The amount that you are charged for mortgage insurance will depend on the loan type and the amount. At Lezamiz Real Estate Co., we will often estimate a house payment for you, and the rule of thumb we go by is that mortgage insurance will be approximately 0.5% of the purchase price- which, in continuing our $200,000 example, would be $1000 per year, or an additional $83.33 per month. Tenny Garner, a home mortgage consultant at Wells Fargo here in Twin Falls, stated that in using a conventional loan, mortgage insurance will be more expensive. With an FHA loan, mortgage insurance would be less, but you may have a higher interest rate. She highly recommends consulting a mortgage professional, because these figures are so volatile, and no one loan is ever the same. Mortgage insurance also goes away once you reach approximately 20% or greater equity position in your mortgage.
Homeowner’s Insurance
Homeowner’s insurance is required by lenders. It is something that is highly beneficial to the homeowner, because it helps replace or repair your home in the event of a catastrophic loss to your home.
Debbie Lattin Insurance in Twin Falls, Idaho, gave us some basic guidelines for when they are figuring homeowner’s insurance. Rates for homeowner’s insurance are calculated on many factors. They are figured according:
· To the year the home was built
· The square footage of the home
· Its replacement cost value if it had to be rebuilt
· Your credit score
Location is also a major factor in insuring a home, based on whether it is within or outside city limits, because this determines how close it is to a fire station and what their response time will be in case of a fire emergency. Most homes are insured for the replacement cost value, which may be more than what the home is being purchased for. The going rate of construction may be higher, and there are other factors as well.
To give our clients an approximate idea of their homeowner’s insurance, we use 0.25% of the purchase price. For the $200,000 home we’ve been working with, homeowner’s insurance would be approximately $500 per year, or $42 each month.
Homeowners insurance is designed in the insurer’s best interest, and is a definite asset to you as a homeowner. Make sure you clearly understand your position with your insurance agent and know exactly what your homeowner’s insurance coverage entails.
Property Taxes
Also included in your monthly payment will be property taxes for your home. Right after purchasing your home, we will remind you to go to the courthouse to file for homeowner’s exemption, which will save you a substantial amount in taxes. Doug Myers, Vice President of Land, Title & Escrow in Twin Falls, illustrated property taxes and the benefits of homeowner’s exemption for us with the following example.
The county assessor determines the taxable value of your real property or land, as well as the improvements to the land(house, shop, corrals, etc.). For example, let’s say the real property of your home in Twin Falls is assessed at $60,000 and the home itself is assessed at $140,000, for a total value of $200,000. The homeowner’s exemption gives a 50% reduction of the value of the improvements, up to a maximum reduction of $75,000. In this example, the $140,000 value of the home would be reduced by 50% or $70,000. This means that the total taxable value of the property is reduced to $130,000 ($60,000 lot value + $70,000). If the county treasurer tax levy amount is 1.0% of the taxable valuation, then the tax amount due is $1300 ($130,000 X .01). Without a homeowner’s exemption, your total tax bill would have been $2000 for the year!
An important thing to note about homeowner’s exemption is that it is not allowed on the real property valuation, only the improvements. The main residence is the only improvement that qualifies for the homeowner’s exemption.
Principle and interest: $1019.96
Mortgage Insurance: $83.33
Homeowner’s Insurance: $42.00
Property Taxes: $108.33
Monthly Total: $1253.62
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So let’s put all these components together to see the total amount of your monthly payment for your beautiful new home!
Please remember that these amounts are meant to act as example only, and to help better illustrate what goes into your monthly house payment. They are not exact, as there are many individual factors that go in to the process of figuring your particular payment amount. We, along with any of the professionals named in this blog for reference, would be happy to sit down with you and help you better understand these components. Buying a home is a big decision, and we hope this been helpful as you look into making that purchase.