Mortgage Basics

Estimating Monthly Costs

Buying your first home can be a challenging experience. One of the most important things is to know how to properly estimate your financial obligations. That way, you get the most out of your mortgage. So how can a first time buyer know what to expect in payments and exactly where that money goes?

As a rule of thumb, it is a good idea to estimate that your total monthly payments will be about 1% of your total loan amount, including whatever costs you roll into your mortgage: i.e. closing costs, title searches, appraisals, etc. Therefore, if you have a $90,000.00 home and $10,000.00 worth of closing/financed costs, then your loan is $100,000.00.  A prudent estimate is to set aside approximately $1,000.00 per month for the life of the loan to cover your costs (this example is set at $100,000 loan amount at 8% for 30 years fixed). The quick math is to get your Good Faith Estimate (GFE) from your loan officer, and multiply it by 0.01 to arrive at your estimate. EXAMPLE: $100,00 (Loan) x 0.01 = $1,000 (1%)

Adding up to 1%

You may notice that if you plug some of these figures into a finance calculator or  finance search engine, the estimated payment is several hundred dollars less than the 1% I mentioned. That is correct. However, it is important to account for mandatory costs associated with owning a home. Typically, the mortgage will consist of Principal and Interest (PI). However, being a home owner also requires that you pay Taxes and Insurance (TI) on your home. Buyers may set up a payment to include PI+TI into their payments via escrow. Escrow is when the bank holds your tax money in trust for the homeowner. This ends up being one payment per month. Or homeowners may pay their own insurance and taxes at the end of the year. Taxes and insurance will vary from place to place so these numbers will fluctuate, but estimating payments at 1% will typically satisfy these four components. Even assuming that TI is a bit higher in your area, 1% will keep you from being several thousand dollars short at the end of the year.