Total Monthly Housing Expense When You Buy a Home
- What is Total Monthly Housing Expense?
- The better you understand total monthly housing expense, the better you can plan for the true costs of owning a home and having a mortgage.
Total Monthly Housing Expense Instructional Video
It is super important to realize that your mortgage payment is only one component of the numerous expenses that you are responsible for when you own a home and have a mortgage. When you think about the costs involved in having a mortgage you need to focus on your total monthly house expense. By focusing on your monthly housing you will be able to select the mortgage that is right for you and properly manage your monthly budget.
Total monthly housing expense includes your monthly mortgage payment plus other housing-related expenses such as property tax and homeowners insurance as well as other potentially applicable expenses such as homeowners association (HOA) fees, private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP). Your mortgage payment (principal and interest) plus property taxes and homeowners insurance is often referred to as principal, interest, taxes and insurance, or P-I-T-I for short. Additionally, you should factor in the cost for maintenance and upkeep of the property, including potential repair.
A breakdown and explanation of the components of total monthly housing expense are outlined in the table below. Below the table, we provide a graphical example that illustrates the various components of monthly housing expense.
- Represents the monthly cost of borrowing money from a lender and is typically the largest component of MHE
- Mortgage payments are typically comprised of principal and interest components
- Without going into too much detail, the mortgage payments for amortizing mortgages, or mortgages where the loan balance is paid down over time, have both a principal and interest component
- The component of your mortgage payment that goes to pay down your loan amount
- The component of your mortgage payment that represents the cost of borrowing money from a lender. Interest payments do not reduce your loan amount
- Most states charge a tax when you own a property
- Property taxes vary by county and can range from 0.5% to 3.0% of the value of the property
- So if you buy a home for $300,000 and the property tax rate in your county is 1%, then your annual property tax bill is $3,000, or $250 per month
- Some, typically newer, housing projects may also include a Special Property Assessment Tax to pay new infrastructure like roads and schools
known as Hazard
- This is insurance in case something bad happens to your house
- Insurance premiums vary depending on the value of your property and where it is located and the type of policy you purchase in terms of coverage level and deductible
- Homeowners’ insurance can run from several hundred to several thousand dollars per year. Review homeowners insurance quotes if you are interested in getting a quote on homeowners’ insurance
- Also known as HOA fees, most condominium complexes and some housing projects charge property owners monthly fees for the maintenance and upkeep of the project
- Some HOA fees may also include homeowners’ insurance as well
- HOA fees vary depending on many factors including the size and age of the complex and value of the properties. HOA fees can run from less than $100 per month to over $1000 per month.
- Depending on your loan type, the size of your loan and the amount of your loan relative to the value of your property (Loan-to-Value or LTV ratio), you may be required to pay private mortgage insurance, or PMI
- PMI is typically required when the LTV ratio exceeds 80% (so the amount of your loan exceeds 80% of the value of your house)
- PMI typically requires the borrower pay an ongoing annual fee, paid monthly. PMI fees vary depending on many factors including LTV ratio, credit score, mortgage term, mortgage amount and mortgage type and can range from .20% to 1.65% of the mortgage amount
- If you obtain an Federal Housing Administration (FHA) loan you are required to pay an up-front and ongoing annual Mortgage Insurance Premium (MIP) which is an additional cost on top of the monthly mortgage payment
- The FHA offers government-backed mortgage programs designed to help low-income individuals and individuals with limited funds buy a home
- The up-front MIP is 1.75% of the mortgage amount
- The amount of ongoing MIP depends on mortgage amount, loan-to-value (LTV) ratio and mortgage term
- Example: Total Monthly Housing Expense
The graph below demonstrates the components of total monthly housing expense. The chart represents total monthly housing expense for a borrower with a $380,000 mortgage with an interest rate of 4.0%. In this example, the borrower is required to pay a homeowners association (HOA) fee of $100 per month but is not required to pay other potentially applicable housing-related costs such as private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP). As the chart demonstrates, your monthly mortgage payment ($1,800 in this example) is only one component of total monthly housing expense ($2,340 in this example).
$1800border$550 Principal$1,250 Interest