What it Actually Costs to Own a Home
Raise your hand if you googled “mortgage calculator” to estimate your monthly house payments? Everyone? Yeah, me too.
A common misconception, especially among first-time buyers, is that the mortgage is your total house payment. In actuality, the mortgage is only one cost to budget for when looking to purchase your home.
WHAT A PITI
You need to be thinking about the acronym PITI. Each letter stands for a monthly cost associated with your home. These costs are pretty consistent, so you’ll get a great sense of what you’ll be paying each month.
(P)– the principal amount of your mortgage
(I)– the interest on your loan
(T)– property taxes
(I)– homeowner’s insurance. This may also include private mortgage insurance (PMI) if you put less than 20% down.
ESTIMATING PITI TO HELP SET YOUR PRICE RANGE
Here’s an example of how I might determine my price range for buying a home. Let’s say I plan to purchase in the $180,000 range.
(I)– rates at 5%
Estimating the above, I’d hop back over to my mortgage calculator and type in these numbers. Google tells me that the principal and interest amount will be $966/mo.
(T)– 1.79% of home value
You can either estimate taxes by using your town’s mill rate or go to your county land records site and look it up. For this example, I googled Wisconsin’s average mill rate. Currently, a property is taxed at around 1.79% of it’s value. I’ll pay about $3,222 annually or $268.50/mo.
(I)– .05% of home value for homeowner’s insurance
You won’t know the annual cost of homeowner’s insurance until you get estimates from insurance companies. In the meantime, multiply the value of the home by .005. In my case, I estimate I’ll pay $900 annually, or $75/mo.
If I didn’t put 20% down (most buyers don’t), I’ll also need to factor in PMI. Your lender will tell you what your PMI will cost. To estimate on your own, multiply the principle by 1%. If my loan is for $180,000, I’ll pay $1800 annually or $150/mo.
MIX IT ALL TOGETHER AND WHAT DO YOU GET?
(P + I)– $966/mo.
(I)– $75/mo. + $150/mo.
Grand Total: $1459.500
That, my friends, is a BIG difference from just the mortgage payment. If I’m not willing or able to pay nearly $1500/mo for my home, I would immediately recalculate PITI with a lower home sale price.
Maybe I thought I could afford $180,000, when in reality I’m much more comfortable at $150,000. Stranger things have been true.
I’ve also worked with buyers who had the opposite experience- when running PITI calculation, they found they could actually afford more house! The point is, know all of your numbers. The more informed you are on your financials, the more confident you will be when putting in offers.
Not mentioned in these calculations: down payment, closing costs, escrow. More on that another time!