If you are in the market to buy a home, one of the first steps in the process is determining how much you can afford. If you are going to be obtaining a loan, or mortgage, to purchase the home your monthly payment will include more than just the principal and interest (commonly called P&I). Your monthly payment will typically include an additional amount to cover property taxes and insurance.
How much will property taxes and insurance cost me?
As we mentioned, your monthly mortgage payment will include an amount to cover your insurance and taxes. This is commonly called a “PITI” payment (principal, interest, taxes, insurance). You can easily calculate the principal and interest payment for your new mortgage by just knowing the amount of the loan and the interest rate you are being charged. However, taxes and insurance are not that easy to calculate as they vary from home to home. Factors that can impact both of these items include the value of the home, location of the home, and even how much money you are putting down. Unfortunately many new homebuyers leave out these two items, which could cost a few hundred dollars a month.
Property Tax 101
The real estate tax is charged by your local county and is based on the assessed value for the home. In Florida, these taxes typically cover local infrastructure, transportation, schools, and other public services that the city and county provide. Keep in mind that the amount of your property tax can change every year as the value of your home increases.
Mortgage Insurance 101
There are two types of mortgage insurance depending on the type of loan you get. If you get an FHA loan, then you will have Mortgage Insurance, also known as M/I. If you have a conventional loan and put down less than 20%, you will be required by the bank to have Private Mortgage Insurance, or PMI. One of the benefits with a conventional loan that is owned by Fannie Mae or Freddie Mac is that your PMI will drop off once you have paid down your principal to 80% of the value of the home. With an FHA loan, M/I remains on the loan until the loan is paid off or refinanced.
Homeowners Insurance 101
A must have for any homeowner, and a requirement of most lender, homeowners insurance protects your home and your personal belongings against a variety of risks including theft and fire. In some areas, you will also need flood insurance if your home is located in a flood zone. In Florida, a must have for all homeowners is hurricane insurance as a typical homeowner’s policy will not cover damage that occurs as a result of a hurricane. Most lenders will collect the premium for your policy as part of your mortgage payment and then pay the insurance company for you. This protects the lender and ensures their collateral is always insured.