When purchasing a home, arranging your finances is the usual topmost priority task. Before jumping into buying, you must be well aware of how much you can afford. Thus, it is but proper that the purchase budget is well-planned. Including in your calculation what the lenders commonly refer to as PITI or Principal, Interest, Taxes and Insurance would give you a better overview of your total home buying expenses.
These components make up your monthly financial obligation attributed to your mortgages. In order to understand the relevance of computing these in relation to your purchase budget, discussing them one by one would present a much clarified revelation what these are really about.
The principal is equivalent to the total amount of your loan and a portion of this goes to paying each of your mortgage dues on a monthly basis. Thus, as you gradually pay such amount, your outstanding balance is reduced. Your home equity is consequently increased, whereas this component refers to the percentage of the home you actually own. Note that it is important that you always pay this particular component so as you can easily gain whole ownership of your home.
The interest refers to the amount the lenders would ask you to pay for initially getting the loan to purchase a home. This includes a fraction of your outstanding principal, which makes it the common largest financial obligation. There are different types of interest plans. In case you opt for the adjustable-rate mortgage (ARM), the interest rate fluctuates almost unpredictably, as its name implies. It could increase or decrease monthly, once or twice a year or retain a fixed rate for a certain period before it changes again.
The taxes refer to the levy attached with owning a real estate property. As you pay your lender this amount, such fund would be redirected to the local community. You are then indirectly contributing to paying for community services such as schools, public roads, police and other municipal service. For one, annual property taxes are deliberated according to a percentage of the property value. In most cases, 1.8% is the average amount allocated to this component.
The homeowner’s insurance is the amount you pay your lender which they then disburse to your insurance company. Your lender encourages that you get a policy upon buying a home. Naturally, the lending agency wants to protect your property as they invest in it too. There are different policies depending on the company you acquired your insurance from. But generally, this expense includes protection of your home, your personal belongings and liability coverage. The insurance policy should be agreed upon to be paid for a set period of time. The bulk of compensating for this is the premium. This is calculated according to your home value and liabilities involved, if any.
The type of loan you will get will affect the variation of the amount of each component. This then means that you have different payment options. There are some types of loan that do not demand principal payments. For example, some have interest-only mortgage, thus you are not obliged to pay for any principal repayment every month. Tax rates and insurance rate per coverage alter amounts depending on location. Thus, it is important that you contact your tax collector’s office and insurance company so you can have earlier preparation for such costs.
These technical financing attributes may be too stressing to do on your own manually. Consulting an accountant or using home loan calculators via the Internet can lessen the gravity of the home purchase budgeting task. And as you consider asking for assistance, you can better understand and plan for responsibly maintaining your home payments.