Mortgage Basics 5: Know your payment
Often times people will ask during a mortgage application what their interest rate is and how much down payment they need, money to come in with and things like that. I want to make sure that you understand EVERYTHING that could affect your loan payment.
What does your mortgage payment consist of?
Most likely, your mortgage payment will be impounded. What that means is that your payment will consist of your loan payment (Principal and interest or P and I), property taxes, home insurance, possibly mortgage insurance or MI (depending how much you put down), and flood insurance if applicable (not common in Southern California).
How do property taxes affect my payment? Even though everyone typically has a tax base of 1%, some communities make you pay for additional assessments and Mello-Roos. An average adjusted tax rate in my area is about 1.4%. Take a look at the difference you pay in JUST real estate taxes if we change the tax rate from 1.4% to 2% (probably see this rate on newer built homes or houses located near schools, parks, etc.).
Just by raising the tax rate slightly, your house payment goes up $150 per month or $1,800 a year!
How does home insurance affect my payment? If you are in a high fire risk area, or high crime area, your home insurance will cost more because it's riskier for the insurance company to insure you. If that same home with the 2% tax rate is in a location difficult to insure, it could make your payment go up even more!
In this example, with the same tax rate, and raising the insurance $40, you're now paying about $190 month more, and you haven't even touched the interest rate!
How much does the interest rate affect my payment? You would be surprised that your taxes and insurance could actually have a higher impact on your payment than a slight raise in the interest rate. If we go back to the original chart with $60 for insurance and 1.4% property taxes, let's see how much an eighth in the rate or .125% costs you.
Your payment would only go up about $20!
Summary: While interest rates are an important part of your house payment, you can see how tax rates and insurance increases can have a much larger affect on your house payment. I would advise that you research the tax rate on the property first, then the interest rate on your loan and lastly shop for home insurance. Of course, you'll want to meet with an awesome loan professional (such as myself) to make sure you are getting the best loan for your needs.
Side note! Home Owner Associations (HOA's) are not included in your mortgage payment, even though you will have to qualify for the HOA payment!
Questions? Call/ text me 951.595.1345 or send me an email!