The most important element of buying a home – even more than deciding what style, size and school district – is determining how much you can afford. Unless you pay cash (my name is Casey, please call me immediately) you will need to find out how much of a mortgage you qualify for and are willing to pay.
Calculating this is not like figuring the trajectory needed for the Hubble Telescope to take that money shot of Jupiter, but it isn’t as easy as 2+2=4, either.
There are plenty of online mortgage calculators which are accurate. But they don’t necessarily give the complete picture. Most of these calculators do a simple equation based on a given set of variables:
“loan amount” x “interest rate factor” = “mortgage payment (principal & interest ONLY)
There’s simply more to a payment than that. Also, these sites are not equipped to advise you whether you’ll qualify for a mortgage or not. (More on that in an upcoming post.) But for now let’s look at what else is included in mortgage payments.
First, in addition to the principal & interest (P&I) figure one gets using the formula above, most buyers will need to include taxes & insurance (T&I) with their monthly payment. These four components together are commonly referred to as “PITI“.
The T&I are called ‘escrow items’ and equal 1/12th of the annual tax and insurance bills. The lender holds this money in an escrow account. When the tax and insurance bills come due, they’re paid by the lender from the escrow account.
The ‘taxes’ portion refers to the property taxes due on that particular piece of real estate. Since each house will have a unique property tax bill, that cannot be calculated by the online sites. One needs to find out the annual property tax amount, divide by 12 and add that number to the P & I. (In Guilford County, property taxes can be found here. To understand how property taxes are determined in Guilford, read this post)
The ‘insurance’ component is homeowner’s insurance, a figure determined by your insurance agent. Again, take the annual insurance premium, divide by 12 and add to the P & I & T.
Voila! PITI.
But wait. There’s more.
Depending on the type of loan (conventional, FHA or VA) there may or not be mortgage insurance, known as PMI or MPI. This is not homeowner’s insurance but is mortgage insurance, paid as a premium to cover the lender in case of the loan not paid back.
These premiums are really hairy to calculate as they are based on how much down-payment is made, the amount financed and other variables. Here is when speaking with a good, knowledgable lender is absolutely a must. And, not for nothing, but a lender on the other end of a 800 number is almost certainly NOT going to know about the property tax and insurance situation for your particular locale. Call someone who knows your market.
To illustrate what I mean, here’s a recent communication from my favorite lender, explaining yet another change in FHA loans:
Huh?
Fear not. Getting all this figured out doesn’t have to fall on you alone. Or on me, thank goodness. Asking qualified professionals for help just makes good sense.
Now, where’s my Advil?
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The thoughts & opinions are mine. The quips that fall flat are someone else’s. Please feel free to shoot me an email with a question or a good joke.
And remember, real estate agents aren’t bad. We’re just drawn that way.
