As a first-time homebuyer, you’re likely concerned about the financial obligations that come with owning a home.
- How much can you expect to pay each month?
- What about taxes?
- How can you best protect your investment?
Similar to other large purchases, like a car or a boat, homeowners are expected to make monthly payments toward their loan, including interest. Homeowners also need to insure their purchase and pay annual property taxes. It’s a lot to keep up with, but don’t worry; we’re here to help!
The 4 things, aka P.I.T.I.
When it comes to mortgages, your overall out-of-pocket expenses are usually combined into a single monthly payment, known as P.I.T.I., which is short for Principal, Interest, Taxes and Insurance.
Let’s break it down so you know exactly where your monthly mortgage payment is going.
1. “P” stands for Principal. Your principal is the total amount of money you borrowed from your lender. If your loan was for $250,000, your initial principal is $250,000. Your monthly mortgage payment will pay down a portion of that principal every month but don’t expect to pay less as your principal decreases. Unless you refinance, your monthly principal payment will likely remain the same for the life of your loan.
2. “I” stands for Interest. This is the amount your lender charges you for loaning you the funds to buy your home. It’s determined by the interest rate you locked into when you closed on your home loan. With home financing, there are typically two options for interest rates: fixed-rate mortgages and adjustable-rate mortgages. With a fixed-rate mortgage, your interest rate will not change for the life of the loan, even if market rates go up or down over the years, and your monthly payment remains steady. That’s not so with an adjustable-rate mortgage as your interest rate is fixed for a shorter period of time, after which it can change based on current market conditions. This means your monthly mortgage payment could adjust up or down throughout the life of the loan.
3. “T” stands for Taxes. Set by your local government, your annual taxes are based on the current value of your property. This means that they can change over the life of your loan as your property is reassessed. If you opt to include your property taxes in your monthly mortgage payment, your annual tax bill will be divided into 12 installments and collected each month as a component of your monthly mortgage payment. The tax portion of your monthly payment is then held in escrow and paid on your behalf when taxes are due. Keep in mind that if your home’s taxable value changes over the years, your monthly mortgage payment may increase or decrease. Your mortgage lender or servicer will notify you of any variations.
4. “I” stands for Insurance. This part of the monthly mortgage payment goes to protecting your property in the event of a disaster or accident. Like property taxes, your monthly insurance payments can be collected and held in escrow and directly paid to your insurance company. Changes in your coverage could impact your monthly mortgage payment.
Being cleared to close
“Clear to close” is another term you might hear during your homebuying journey. At least three days before you close on your mortgage loan, your lender will provide a Closing Disclosure (CD) for your review.
The Closing Disclosure is a five-page document outlining the terms of your loan – including a breakdown of your monthly payment and an overview of your closing costs. These can include fees for things like appraisals, credit reports, IRS transcripts, title searches, escrow fees and attorneys. Take the time to review your CD carefully and understand the initial and long-term costs of your loan before you sign the dotted line.
Remember to rely on your mortgage lender along the way. They’ll make sure you understand the financial responsibilities involved as you close the deal on your dream home!
Still looking to connect with a local loan officer to help you get a home loan? Find one here!