What makes up a mortgage payment? Just remember “PITI”: principal, interest, taxes, and insurance; together they determine what your clients can truly afford. 👀
▶️Principal: amount a buyer initially borrows from the lender to purchase a home. It is paid off for the life of the loan. As time goes on, more of your monthly payment will go towards Principal.
▶️Interest: a percentage of the principal the buyer pays as a fee to the lender for lending the money. Unlike principal, as the loan ages, less of the monthly payment will go toward interest (🎉). The interest rate varies from buyer to buyer and depends on many factors like credit and the market—interest rates are constantly changing.
▶️Property Taxes: calculated as a % of the property value and is established by the assessor. It can change from year to year and depends on factors like the assessed value of the home and local tax rates. Assessed value is not the same as the market value. As the assessed value rises over the years, so will the taxes.
▶️Insurance: Homeowners insurance protects the home in case of a disaster or accident on the property. Typically, if the worst were to happen, homeowners insurance would cover the cost of repairing or rebuilding the home to its previous property value. Mortgage insurance (MI) exists to protect the lender. It applies when the buyer does not put down 20%, typically. It is typically .5-1.5% of the principal.
Insurance and taxes, while paid monthly, will be held in an escrow account and paid in full to the insurance company or local government when they are due.
🏡Finally, don’t forget homeowners association (HOA) fees. While not part of the monthly mortgage payment, HOA fees do count toward the debt-to-income ratio (DTI) a lender considers when qualifying a buyer for a home.