Total Estimated Monthly Payment
When looking to purchase a new property, the question of
affordability is never far from one’s mind. While most
buyers start their property search with a certain price range
– and upper limit – in mind, it is very easy for
this figure to creep upward as the search unfolds. It is,
therefore, not unusual to focus most of the attention on two
important factors when looking at mortgage affordability:
income and the cost of the house.
Nevertheless, there are other housing related expenses that
should be considered. In other words, in addition to asking,
“Can I qualify for and pay for this mortgage?”
In short, mortgage purchasers should not lose sight of the
total cost of the property, in particular the total monthly
outlay. To build a more complete picture of the total monthly
outlay for housing, prospective homeowners should become acquainted
with, as well as, consider, the following factors as they
relate to the property in question:
Principal: The amount of money borrowed or the balance remaining
on the original loan. This term refers to the portion of the
monthly payment that goes to paying down the original loan
amount, as opposed to that portion which goes toward paying
the interest.
Interest: The cost of borrowing money. This is a reference
to the portion of each payment that goes toward paying for
the loan. Since interest on a mortgage is mostly paid on the
front end, the lion’s share of each monthly payment
goes toward interest during the early years of the loan. Note:
The amortization schedule received during, or shortly after,
closing provides a breakdown of principal and interest for
each payment.
Concept of “impounded” versus un-impounded loans:
Principal, interest, real estate taxes, and insurance are
included in the payments associated with impounded loans.
The funds are then held in escrow and disbursed when payments
are due. If the homeowner does not have an impounded loan,
then they must pay these expenses as they become due. If not
planed for, this can have a major impact on expenses during
the months of the year that payments are due.
Taxes: Real estate taxes must be paid, generally twice a
year, either directly by the homeowner or from the escrow
account. If not paid, the county will eventually place a lien
on the property and the property is subject to foreclosure.
Insurance: Homeowners should maintain an insurance policy
on the property sufficient to cover the property and its contents
as well as personal liability.
Monthly Assessments: Owners must budget for mandatory assessments
paid to homeowner’s associations. Condominium owners,
in particular, must budget for these payments, as well as
potential “special assessments”. These are mandatory
but are not included in the mortgage. Monthly assessments
and special assessment payments can place a considerable strain
on monthly expenses if they have not been budgeted.
Maintenance and Upkeep: New homeowners, in particular, should
consider the cost of ongoing maintenance, repair, and general
upkeep of the property |
