In a previous post, how will you know when it’s safe to buy a home, I discussed the issue of monthly housing cost vs your monthly household income.
The chief affordability rule is that your monthly housing costs must not exceed 32% of your gross monthly household income. The housing costs include monthly mortgage payments, taxes and utility expenses.
Let’s take a look at what a monthly mortgage payment looks like and what it is composed of.
Most lenders collect mortgage payments in the same way but there are always smaller lenders that can have different procedures.
Some people refer to mortgage payments as PITI since this is an acronym for the 3 parts that make up the payment, principal/interest, taxes, and insurance.
The first is P/I or Principal and Interest. Principal is the amount currently owed on the loan, and interest is a percentage charged on the principal amount. These payments will change depending on what type of loan program you may have. Talk to your lender more about this issue and all the new programs that may be available for you. Make sure to check out The Top 10 Questions To Ask Your Lender.
Second is T or Taxes. Property taxes are assessed by the county that your new house will be in and is collected as part of your mortgage payment by your lender. The lender holds the money in an impound account to make sure these things get paid and that the loan does not go into default.
The lender then pays the property taxes on your behalf when they are due, usually twice a year.
Third is I or Insurance. The type of insurance that we are talking about is home insurance. The lender collects this for you in an impound account for the same reason as property taxes and pays them for you on your behalf.
A fourth ever increasing component of mortgage payments is now M/I or mortgage insurace. This is assessed on borrowers with FHA Loans, or conventional loans with less than 20% down.
Because of the many legal and tax situations that can arise through the sale and purchase of real estate ALWAYS consult with your ATTORNEY or ACCOUNTANT before making ANY decisions in ANY transaction
* THIS ARTICLE WAS POSTED AT Thomas Feng’s Bay Area Connect *