If you are looking for the best time of year to buy a home it is always the winter months….before the tax refunds hit. Yes, there usually aren’t as many homes on the market, but during the winter months, but less buyer competition means sellers are offering more buyer concessions… like closing costs, and interest rate buy downs. Another excellent thing about buying during the winter is usually the rain. Why is this a good thing? The best time to do a home inspection is during the ‘wet’ months because in our area water is the big thing and you want to do a home inspection during a time when you have a better chance to see if there are any drainage, or water issues. Another good thing about this time of year for buying is that home prices are usually cheaper than they will be during the warmer, drier months when there are more buyers in the market. The more buyers in the market…drives up the home prices because there is more competition and homes sell quicker. If you need some time to think about it….buy during the winter. The weather is your friend right now.
Now…on to this weeks topic… What is in your mortgage payment?
Buying a home will be the largest purchase you ever make. The only thing that will cost your more than buying a home is having a child. Like a child, you have to take care of your home though, and there is more to home ownership than most people realize.
Every month you pay bills, and your mortgage payment will most likely be your largest monthly expenditure, but what is it?
Now…what is all in your payment?
There are four parts to your mortgage payment…it is called a PITI payment. What that means is Principal, Interest, Taxes, and Insurance. For example, if my payment was $2800, but my principal/insurance portion is only $1800 a month, the other $900 a month would be put into an escrow account. Out of this account comes the homeowners insurance payment once a year, and the property taxes would also paid from this account twice a year. All of these fees are wrapped into the monthly payment. Anytime you are using a FHA, or any government type of loan like RD (USDA), or the down payment assistance, these fees must be wrapped into the mortgage payment. Many people also have Mortgage Insurance that is also wrapped up into their payment
Mortgage Insurance vs Homeowners Insurance
Mortgage insurance is different than home owners (sometimes called, Hazard) insurance. In a nutshell, Mortgage Insurance protects the lender in case you default on your loan, and homeowners insurance protects you & the lender in case something happens to the home….ie.. a fire, a tree falling on your home, a car driving into your home, burst pipes, etc.
Homeowners Insurance (aka Hazard Insurance)
Now, please remember, you do choose your insurance company! One of the things I suggest to clients is to contact their insurance company after they make their offer, and ask about homeowners insurance costs, and coverage. Average homeowners insurance is about $500-$700 a year….again, it is wrapped up into your monthly mortgage payment so it is not another extra expense. You do get to choose your company, and many companies will give you discounts for ‘bundling’ your policies. It doesn’t hurt to call around for quotes. Once you choose a company request that your insurance agent send over an ‘insurance binder’ over to your lender. Right now you’re just asking about home owners insurance to cover your home in case something happens outside of your ‘care, custody, and control’. You have car insurance, right (hopefully)? Home insurance is very similar…just for your home. If you live in designated flood plain, there could be an additional flood insurance required. Other insurances you can ask about (usually after you get keys) is earthquake insurance (something to think about where we live), and an umbrella policy (especially if you have teen drivers, or dogs).
Taxes are decided by the county, and are usually paid twice a year. You may get a copy of the tax bill, but again, it is paid by your mortgage company out of your escrow account. I always get phone calls when these bills come out, but I assure you… your property taxes are part of your payment, and already in your escrow account to be paid. No worries.. that is just for your records Your property taxes will be reassessed every year. Please remember that ‘Tax Assessed Value’ is NOT market value.
Principal & Interest
Now…about your principal and interest portion of your mortgage payment this is the lions share of your monthly payment. As we know a portion of your mortgage payment every month goes toward the principal amount that you borrowed to purchase your home, and a portion goes toward the interest that the lender is charging you. In the beginning of your loan the smaller amount goes toward principal, and the larger portion goes toward interest…this eventually switches. We all know the wisdom of making an additional payment every year on your mortgage to reduce your loan time. Some banks will offer to take your payment in two week portions, and make your additional payment for you. Honestly I don’t advise this…..before you think I am crazy, this is the reason why….the bank actually holds your money and makes your additional payment at the end of the year. This isn’t the best way for you, really…. I always pay between $25-$100 extra on my mortgage every month depending upon our finances that month, but apply it directly towards my principal borrowed amount. At the end of the year I have made that extra payment directly towards my principal, which is less money I can be charged interest on! This will shorten my loan length considerably. In the end I actually pay MORE on the principal amount than I would have if I had just made one extra payment. My suggestion to all my clients is to take that $20 from each paycheck and put it into that credit union far away (with no debit card or checkbook for) that is for your home repairs that are needed as a homeowner. If you just put at least $25 per month extra toward your principal loan amount you will also be shortening your loan time. This sounds like a lot…but really is it? You can spend more than that going to feed your family at McD’s, or even Taco Bell nowadays. A couple of Starbucks trips a month will cost you about $25, and while that caffeine boost is nice….taking that $25, and putting it on your loan principal, will help you in the long run immensely. Look at an amortization schedule with your loan amount, length of your loan, and play with it… how many years off your loan, and interest, can you save if you just bump up your principal every month?
So there are the 5 parts of your mortgage payment…Principal, Interest, Taxes, and Insurance…both Mortgage & Homeowners…..all tidily wrapped up into one payment every month.
Your escrow account, and the amount deposited monthly into it, will be reassessed every year. You will receive a notice from your escrow account letting you know if you are currently depositing too much, or maybe not enough, for the projected amounts owed for the next year. So, what does this break down to?
**** If you have deposited too much (let’s say that home prices are receding and property taxes are going down), you would receive a check from your escrow account with a letter that says, “hey… you have a surplus in your escrow account. You can keep the check and your mortgage payment will be XX amount…. OR …you can send the check back to us, and your mortgage payment for the next year will be XX amount.”
**** You might also receive a letter that says, “hey… based off property taxes and projected payments on home insurance, you aren’t going to have enough in your escrow account. You can send us a check in the amount of XX, and your payment will be XX per month… OR … you can take no action and your payment will be XX per month for the next year.” This is often what happens when home prices, and property taxes, are going up. Either way, your monthly mortgage payment will change every year based off of what property values are doing, and what current taxes in your area are.
…and now you know! Of course, I always welcome your questions, and your phone calls! Whether you are wanting to buy, or sell… I got your back.