- The Washington Times - Friday, August 2, 2002

About 6.5 million households are expected to purchase a house this year. Chances are they'll need a mortgage on the property to buy it. With the average price being $152,000, the average American just doesn't have that kind of money lying around.

Here's what's needed: a down payment of at least 3 percent to 5 percent, enough money to cover closing costs (generally another 5 percent) and enough cash in the bank to pay 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 (PITI). 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 payback, 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 equality stops. The T and final I of this formula differ property to property. The T is for taxes, and the I is for insurance and it may include 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 Corp. (MGIC) in Milwaukee, the largest PMI provider in the country. With only a 10 percent down payment, the house will require PMI of $702 per year $58.50 per month.

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 $75 per month.

Finally, there are the taxes, and this is where you'll have to do some local homework. In the Washington area, for instance, there are dozens of tax rates in the surrounding jurisdictions. In my county, Fairfax, it's $1.21 per $100 of 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 combined to equal $1,217.69 per month.

Fortunately, some of these can drop off after a while. 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 generally is required by the mortgage company to protect its investment, but you may want to maintain that policy even without a mortgage. The taxes? Well, the saying goes that only two things in life are certain death and well, you know.

Resources

To calculate your payments, you'll need the taxes and insurance payments in hand to add to the calculation, but here are some good real estate calculators online:

• www.homes.com (Click Calculators & Articles on the right.)

• www.mortgage101.com (en Espanol)

• www.decisionaide.com

• www.realtor.com (Under Tools, click Financial Calculators.)

M. Anthony Carr, director of communications for the Northern Virginia Association of Realtors, has written about real estate for more than 12 years. Reach him by e-mail ([email protected]).


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