So you’re thinking about buying a home but you want to make sure you stay within your budget. Congrats you are already ahead of the game! Most people give little thought to their budget until it’s too late.
When setting your budget you need to know exactly what’s going to be included in your monthly payment. This is key in seeing exactly how much home you can afford.
What’s In My Payment? (PITI)
Principal: The principal is the original amount of money you borrowed from the bank. If you purchase a home for $180,000 and put $10,000 down you have a principal balance. The principal isn’t the only amount you have to pay back however.
Interest: Borrowing money is pretty much never free. Interest is the fee you pay to the bank for borrowing money. Interest is a percentage of the principal amount that you pay back.
Checkout our Mortgage Calculator to see how much your payment is with principal and interest or see Today’s Rates to get your mortgage rate.
Over time you’ll pay less and less interest as you pay down your principal but beware; because most buyers use a 15 or 30 year loan, mortgages are front loaded with interest meaning you’ll pay a lot more interest in the first 10 years than in the last 10.
Taxes: Nothing says welcome to the neighborhood more than paying a tax on your new dream home. Property taxes are based on your home’s value and are paid annually. If you live in Louisiana and it’s your primary residence you can file for a homestead exemption. This will dramatically drop your property tax bill.
You can look up many homes property tax numbers by visiting the search function on the parish assessor website and entering the property address. This will give you a good idea of what to expect.
Insurance: If you’re buying a house you’re going to want homeowners insurance. You want to get a policy that protects you and your stuff from Fire, Wind, and Hail, and Tropical Storms and Hurricanes. If you live in Louisiana it’s also probably a good idea to get flood insurance.
You Insurance company is going to determine how much insurance you have to carry on the home. While some allow you to use your appraisal to get coverage, most insurance companies have a calculation to determine how much coverage you need.
The amount of coverage you receive must be at least as much as the amount you’ve borrowed.
My Insurance Coverage is More than My Loan, Why?
The reason most insurance companies insure homes for more than the amount financed is that you are insuring your home for the cost to rebuild the same home from scratch. This factors in the cost of building material and labor which are constantly changing.
How Do I Pay Insurance?
When you close on your home the first year is collected as part of your closing costs. Then the subsequent years are a part of your mortgage payment.
How Can I Get The Best Deal On My Policy?
When shopping for insurance you want to first make sure that you are shopping with A rated companies who have a proven history of paying claims.
Next you want to shop around. Many of the big name companies are very expensive when it comes to insurance.
You want to find a policy that protects you in the event of fire or water damage, wind, tornadoes, hail and tropical storms or hurricanes.
The other thing to consider is how much the wind or hurricane deductible is. Some companies will charge 5% Hurricane or Wind Deductibles which can be a large bill if something happens to your home.
Aim to find a policy with a 1-2% deductible to ensure you won’t suffer a financial setback should something happen.
Other Fee’s in a Mortgage Payment
Outside of PITI, there are two other payments you could see as part of your mortgage payment.
Mortgage Insurance (PMI)
PMI is a fee you pay to the bank when you don’t put 20% down. This protects your lender in the event you default. PMI does not protect you or your payment in the event you are hurt or can’t pay. PMI only protects the bank. Keep this in mind when making your mortgage decision.
If you purchase a home in a neighborhood with an HOA, chances are you’ll have HOA dues coming out of your payment.
HOA Fees are fees collected from homeowners in order to maintain the neighborhood. These fees cover things like lawn care, park maintenance and amenities within the community.
Having an HOA is a good way to maintain property values as they usually are also responsible for enforcing restrictions.
Buying a home you can afford is the key to making your next purchase a success. The last thing you want to do is be saddled with a payment that makes you “house poor”.
Leave room in your budget to allow you to still be able to do the things you like or you’ll regret it.
Check this out if you’d like to see how much home you can afford.