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8
Buyers: What Your Monthly Housing Payment Really Includes
Getting pre-approved is one thing. Knowing how that number breaks out per month is another—and one that new buyers may not fully understand. Our REALTORS® work with buyers throughout Long Island who fall in love with the principal/interest piece and realize too late that taxes, insurance, and other items have to be added on as well.
The Four Pieces That Comprise Your Payment
Lenders love to use an all-encompassing acronym to describe your housing costs, PITI (principal, interest, taxes, and insurance), but it can be eye-opening to see how each one plays into your bottom line.
Principal and Interest
This portion of your payment is what most buyers think of when they're considering a mortgage: principal (the amount you've borrowed) and interest on the amount you're borrowing. The lion's share of early payments goes toward the latter, while as you gradually pay down the principal, interest becomes a smaller part of your payment. This doesn't happen overnight and won't change much in the early years, but you should know your future taxes and insurance premiums could change as well.
Property Taxes
These are an essential component of your monthly payment, and they can vary widely depending on the property. Rather than relying on an online mortgage calculator, buyers should familiarize themselves with the property's tax figures and factor those costs into their estimated monthly payment. A few things can contribute to wide variations for a given address:
- School district
- Village/town tax rate
- Assessed value (not always the same as asking or selling price)
- Exemptions that may apply to the current owner
Homeowners Insurance
Your lender will likely require proof of a valid policy, and if the premium is escrowed, it will be included in your monthly payment. Getting a few quotes to estimate your premium is a good idea before closing on a home. In addition, some properties may require separate flood insurance depending on the property's flood risk and lender requirements.
Mortgage Insurance, When Applicable
If you're purchasing a home with a conventional loan and putting less than 20 percent down, you'll likely be responsible for private mortgage insurance (PMI), but some programs have their own requirements for mortgage insurance. PMI may be removed once certain requirements are met, depending on the loan. Ask your lender for more details on the type of insurance that would apply to the loan you intend to take out.
Costs That Don't Come With PITI, But Are Still Part of Your Monthly Budget
A few expenses don't get tacked on to your mortgage, and buyers frequently overlook them until it's time to write the first check after purchase. Keep in mind that these costs can vary dramatically on a per-property basis.
- HOA or co-op maintenance fees, which can vary dramatically from building to building
- Utility bills, which can be higher for older homes or properties with outdated systems
- Repairs and maintenance, for which you should set aside some money every year
Common Questions About Monthly Housing Costs
Can my monthly payment change after closing?
It can, especially if you have an escrow account for paying the taxes and insurance on the property. If the amount owed for either of those costs changes, the amount you pay every month may change, too.
Should I ask for a breakdown before making an offer?
Yes, because if you're thinking of a home in terms of a monthly payment rather than total cost, it's crucial to consider the breakdown of the charges you'll be responsible for every month. When you talk to your agent, you should find out:
- The property-specific tax figures rather than relying on a broad area average
- An estimate of the insurance cost for the property
- Any HOA or co-op fees
- Any other expenses specific to the property that could affect your monthly costs
Does a larger down payment always mean a smaller payment?
Generally, a larger down payment can reduce your monthly mortgage payment because it lowers the amount you're borrowing. As mentioned above, putting at least 20 percent down on a conventional loan may also allow you to avoid PMI.
What This Means When You're Looking for a Home
The amount asked for by a property listing can give you a baseline expectation, but keep in mind that two similar homes at the same asking price can have dramatically different monthly payments, thanks to differences in insurance, tax rates, and additional costs.
Take a look at the available properties in Westbury, or contact us to get your search started.
