When you try to figure out how much you can afford as a monthly mortgage payment, you need to think about more than the payment itself. Your monthly payment will be a combination of the money you actually borrow, which is called principal, plus the interest, taxes and insurance associated with the mortgage. All of these charges are frequently referred to as “PITI.”
Principal is, basically, the amount of money you actually borrow in the form of a mortgage. If your mortgage is for $250,000, then your principal is the same amount. This is the amount you’d need to repay to the lender, assuming no interest.
Interest is the money your lender charges you for the privilege of borrowing the principal. And it’s expressed as an annual percentage. Typically, your mortgage payments will be mostly interest in the early days of your loan repayment. As you pay off more and more interest, you’ll start chipping away more of the principal with every payment.
Your property taxes can be a significant expense, depending on where you live and your home’s assessed value. Property taxes vary widely from one area to the next. When you make an offer on a home, be sure to calculate your tax rate and include those payments in your budget.
Then there is insurance. This can refer to a few different types. First and foremost is homeowner’s insurance, which you’ll be required to have in order to get a mortgage. This insurance protects you in the event that your home is damaged or if someone is hurt while on your property. You may also need flood or earthquake insurance, if you buy a home in an area prone to that type of disaster. Another type of insurance is mortgage insurance, which you may be required to purchase if you put down less than 20% of the home’s purchase price for a down payment.
There are a few other expenses that may factor into your monthly home payment. One common cost is homeowners association (HOA) dues, which are monthly fees that cover the cost of building maintenance, some utilities and other services. And while it may not factor into your mortgage, you should also keep in mind how much it will cost to maintain your home and property, including the upkeep of your landscaping, heating and cooling systems, roof and gutter cleaning, appliances and more.
To find out how much home you can actually afford, check out the Redfin Affordability Calculator. If you are ready to start searching for a home to buy, reach out to a Redfin agent and we will help you get started.
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