Components of a Monthly Payment
If I refi can I avoid PMI?
If you have been in your home for several years and are still paying PMI or private mortgage insurance, then refinancing might be one way to eliminate PMI and save money on your monthly mortgage payment.
Many people with adjustable rate mortgages or higher than average interest rates benefit from refinancing their home loans into fixed rate mortgages while rates are low. Depending upon your specific situation, an additional benefit might be the opportunity to eliminate PMI resulting in an even lower monthly mortgage payment.
If you have sufficient equity of at least 80 percent in your home, then check with a mortgage broker about the possibility of eliminating PMI and reducing your monthly mortgage rate.
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What are HOA fees?
Association dues are an often overlooked cost of buying a new home but depending upon the situation, these fees can be a great bargain or a real drain on your budget. Homeowners association fees typically cover the cost of maintaining shared areas of the community: for example a community club house, security or even repairs.
Homeowner association dues can also offer a discount on building, maintenance, cable and other services by contracting with vendors on your behalf. Typical fees range from less than $100 per month to thousands of dollars per year. To determine how HOA fees will impact your budget use these quick tips:
1. Request a copy of the HOA guidelines from your real estate agent for all homes under consideration. One of the benefits of working with a professional real estate agent -who knows and understands the local area- is in-depth knowledge of various communities and amenities.
2. Visit the community. Take time to personally see what you will be paying for and how it is maintained. Many HOA fees pay for themselves by providing community pools, a gym and spa, community events, utility discounts and much more.
3. Speak to residents and research complaints. There are bound to be a few complaints but if you see a trend or a disproportionate number of complaints, lack of maintenance or other problems then it may be a red flag.
4. Make sure HOA fees are up to date when purchasing the home. This is another benefit of working with professional real estate agents and obtaining title insurance. If you are buying a home FSBO then be sure to pay special attention to HOA fees. Outstanding HOA fees can be treated as a lien against the property.
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What are all the fees including in my monthly mortgage payment?
If you are searching for a new home then chances are you have used our convenient mortgage calculator. These convenient tools are a great way to begin your home search but it is important to remember these are only rough estimates. Depending upon your credit, the final selling price of the home, interest rate, duration of the loan and other factors your actual monthly mortgage payments may be higher or lower than the estimated payments.
Use the following checklist to create a budget that takes all the components of a monthly mortgage payment into account:
1. The actual amount borrowed to purchase the house consists of two parts: mortgage principle and interest. .
2. Property Taxes. Property taxes are an ongoing cost of owning a home. Never assume your property taxes will remain the same as the former owner. Instead, check with the real estate agent about how the new selling price will impact the expected property taxes owed when you purchase the home. Real estate prices have increased substantially in recent years resulting in higher property taxes. Additionally, because of inflation, property taxes typically increase each and every year.
3. Homeowners Insurance. Home owners insurance is also individualized depending upon your credit score, location and prior claims related to the property. Before making a final offer on a home, it's a good idea to call at least three insurance agents to obtain homeowners insurance quotes; especially if the property is located in a high risk area such as beach front or is a difficult to insure property.
4. Escrow: In most cases property taxes and homeowners insurance are typically escrowed as part of your monthly mortgage payment however, in some cases you can opt-out and pay the fees directly. Either way, be sure to plan ahead.
5. PMI or Private Mortgage Insurance. PMI is required in most situations where less than 20 percent down payment was made when purchasing the property. PMI will typically run .05 percent to .01 percent of the amount.
6. HOA or Homeowners Association fees are shared expenses required to maintain the community or other shared property. Typical costs range from under $100 per month to several thousand dollars annually depending upon amenities.
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How does mortgage escrow work?
A typical monthly mortgage is comprised of PITI or principal, interest, taxes and insurance. Even if you have a fixed interest rate, it is entirely possible that your monthly mortgage payment will adjust at least once per year due to the mortgage escrow.
A mortgage escrow is the monthly amount that you pay toward the mortgage taxes and mortgage insurance. It is set aside in a special fund until the property taxes and homeowners insurance bill is sent. At that time, the insurance or taxes are paid from the funds that have accumulated in the escrow account. However, each year the insurance or property taxes might increase so the monthly escrow amount is only an estimate that will be recalculated based upon the anticipated fees required for the following year.
An escrow account is a convenient way to assure the funds are there when you need them but some people prefer to handle the payment of homeowners insurance or property taxes personally. It is possible to eliminate the escrow amount but it depends upon the mortgage company. In some cases, you may be required to pay a small fee to eliminate escrow.
Whether you have property taxes and homeowners insurance escrowed or pay it yourself, be sure to verify the bills are paid on time each and every year. Even if the funds are escrowed, it is still your responsibility as the homeowner to make sure the payments are sent and credited on time. If your mortgage had been transferred or you change insurance providers then it is imperative to send written documentation of the new address to assure proper notification and payment.
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Do I qualify for a mortgage tax deduction?
The ability to take a mortgage tax deduction is one reason real estate remains a strong investment; instead of sending money to a landlord each and every month you can build equity and get a reduction on your taxes at the same time. However, each and every year some people are surprised to learn they don't benefit from a deduction on mortgage taxes!
Depending upon your total mortgage cost, many people benefit from taking a standard deduction rather than the mortgage tax deduction. Especially if you put a large down payment or purchase a fairly affordable home, the mortgage interest may not amount to enough to warrant the mortgage tax deduction.
Find out in advance if a mortgage tax deduction will benefit you before making a final offer on a home by using a convenient monthly mortgage calculator and an estimated tax calculator. If it is borderline then you may find the additional tax benefit offsets the increased monthly payment required to purchase a slightly more expensive home. Speak to a knowledgeable real estate broker or your personal tax adviser to determine what is the best option for your situation.
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What is PMI and how to avoid it?
PMI stands for private or personal mortgage insurance and is typically required for those who put less then 20 percent down when purchasing a new home. It is a type of insurance that actually helps new home buyers obtain a mortgage when they otherwise may not be able to do so because of the additional risk of default or a low loan to value ratio. Instead of requiring 20 percent down on the purchase of a home, the bank will allow a loan with less money if it is insured against the loss through the purchase of PMI. Rates vary but expect to pay roughly 5 percent of your monthly loan amount for a modestly priced home.
When it comes to eliminating PMI read your contract carefully. Typically you can petition PMI be removed from your monthly payment once you have paid 20 percent of the loan amount although some contracts allow you to have 20 percent equity instead. In either case, you will need to put the request in writing and document carefully.
The Homeowners Protection Act of 1998 requires lenders to drop PMI once the loan to value ratio reaches 78 percent of the original loan - not market value. If you make minimum monthly mortgage payments that will typically take between 10 to 15 years on a fixed rate 30 year loan.
To request PMI be eliminated from your home loan follow these steps:
1. Read your contract carefully. If you believe your loan is below the 80 percent loan to value ratio then contact your lender and request to eliminate PMI.
2. If Fannie Mae or Freddie Mac underwrite your loan and your local area has experienced rapid appreciation in the local real estate market resulting in your loan value under 80 percent of market value then it may be worth your time to request elimination of PMI.
3. Refinance. There are many extenuating circumstances to consider before taking this option but always be sure to request elimination of PMI when refinancing.
4. Obtain a VA or FHA mortgage if possible. These loans do not carry PMI but they often have additional charges so speak to a mortgage broker or other real estate professional to decide if this is a viable option.
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