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What is PITI?
When you purchase your next house, which 6.5
million U.S. households should do this year, you'll most likely need a
mortgage on the property to buy it. With an average price of $152,000,
the average American just doesn't have that kind of money laying around.
So here's what you'll need: a down payment of at least 3 to 5
percent, enough money for closing costs (generally another 5 percent);
and PITI (Principal, Interest, Taxes and Insurance) reserves, meaning
enough cash in the bank to pay for your monthly payment for the next
three months. In real dollars on a house priced at $150,000, that means
$4,500 to $7,500 down payment, $7,500 for closing costs, and roughly
$3,300 for three monthly payments of $1,100 each. But that depends on
the cost of your taxes and insurance.
The monthly mortgage is made up of principal, interest, taxes and
insurance. The first two elements of this formula are well defined. Plug
in the loan amount, down payment, interest rate and the number of years
for pay back, and you will find that the above loan with a 5 percent
down payment is $948.06 for principal and interest payments to the
lender. But then all things being equal, that's where the equality
stops. The "T" and final "I" of this formula differ property to
property. The T is for taxes the I is for insurance, and it may be more
than one insurance payment. If your down payment is less than 20
percent, you'll have to pay private mortgage insurance
What does PMI cost? This insurance premium, which protects the lender
from a defaulting borrower, varies, depending on the down payment. As an
example, if a purchaser buys a $150,000 home with a $15,000 down
payment, the PMI on that house will be .0052 percent on the loan amount,
according to Mortgage Guaranty Insurance Corporation (MGIC) in
Milwaukee, Wis., the largest PMI provider in the country. With only a 10
percent down payment, the house will require PMI of $702 per year, or
$58.50 per month.
Now, your hazard insurance is for the value of the property to
replace it if it is destroyed by some sort of disaster. Again, this is
going to differ according to the value of the house and your
underwriter, but for a $150,000 house, let's assume a payment of $900
per year, or $75 per month.
Finally, there are the taxes and this is where you'll have to do some
local homework. In the metropolitan Washington, D.C., area for instance,
there are dozens of tax rates in the surrounding jurisdictions. In
Fairfax County, for instance, it's $1.21 per $100 assessed value. Keep
in mind that what you pay for a house may not reflect the assessed
value. If a $150,000 property is assessed at $135,000, the tax bill
would be: $135,000/$100 = 1,350. Multiply 1,350 by $1.21 = $1,633.50 per
year, or $136.13 per month.
So for a $150,000 house with a 10 percent down payment (mortgage
amount of $135,000), on a 30-year loan at 7 percent we have a $948.06
principal and interest payment, plus a $58.50 PMI payment, plus a $75
hazard insurance payment, and finally a $136.13 tax payment per month,
for a total of $1,217.69 per month.
Fortunately, some of these costs can drop off after awhile. The
private mortgage insurance, by law, can be dropped after your equity in
your home reaches 20 percent. Obviously, if you stay in the house long
enough, you'll drop the principal and interest. The hazard insurance is
generally required by the mortgage company to protect its investment,
but you may want to maintain that policy even without a mortgage. And
the taxes?You know what they say: only two things in life are certain:
death and ....well, you know.
Copyright © 2002 Realty Times. All rights reserved. 8/7/02 |
