By Mike Heayn Real Estate 101
WHAT DOES YOUR PAYMENT REALLY consist of? When a first time homebuyer is purchasing a home, they should remember that their monthly payment may do more than just pay down their loan. Mortgage payments usually consist of a loan payment and impounds for insurance and property taxes. Impounds are a monthly collection that goes towards semi annual or annual costs.
If you are looking to become a new homeowner, you will need to know what your house payment will be. Depending on the type of loan, it will either be a principal and interest payment or just an interest payment. For example, if you placed 20 percent down on a $500,000 purchase, you would get a loan for $400,000. At an interest rate of 6.5 percent the principal and interest payment would be $2,528.27, while an interest only payment would be $2,166.67. However, this is just the beginning. You still need to add insurance and property tax impounds, which can increase the payment by as much as 35 percent.
Behind the home loan the next largest part of a house payment are the property taxes. State of California property taxes consist of three separate categories:general tax levy;voter approved indebtedness; and direct/special assessments. Back in 1978, California voters passed Proposition 13 to control the amount of the general tax levy, which is limited to 1 percent of the assessed value of the property. The general tax levy can not increase more than 2 percent over the previous year’s tax bill. Voter approved indebtedness includes taxes such as bond repayments. Finally, direct/special assessments are controlled by proposition 218. Services such as sewer, water and refuse collection can be imposed without a vote but may not be greater than the cost of providing service. As a general rule of thumb,the tax rate is approximately 1.25 percent of the purchase price. In the example above, a purchase price of $500,000 and a tax rate of 1.25 percent, the property taxes would come to $6,250 annually or $520.83 monthly.
When purchasing a house one of the most important things to include is property insurance. You’ll want to protect what maybe your most important asset. Property insurance is a tool to protect your home. Also, all lenders will require some type of property insurance,to protect their investment in your purchase. Insurance rates vary from state to state and minimum requirements are always changing. In using the example above we will assume an annual insurance rate of $900. Monthly, the property insurance is $75 on a $500,000 purchase.
If we add all the elements of the house payment from the $500,000 purchase, we get a much larger payment than just adding in the loan amount. If we use the principal and interest payments of $2,528.27 and add in the monthly insurance of $75 and property taxes of $520.83 the total comes to $3,124.10, which is about 20 percent more than just the loan payment. Check with your lender to see what impounds are required. Some lenders may allow them to be paid directly, which, in some situations, can provide a cost savings.
MIKE HEAYN is a Washington Mutual multi —family loan consultant. He (310) 428—1342, or e—mailed at
Originally published in the Santa Monica Daily Press print edition on February 28, 2007. Read the original PDF.