Here are a few Boston area home buying tips for renters to consider if you’re ready to take the big step toward home ownership. In addition to the basics like saving up for a down payment and deciding on a housing budget, there are other important considerations to address.
Renters have become accustomed to paying a fixed amount of money during their rental term. For the most part that amount rarely changes until it’s time to renew the lease. For homeowners, it can be a slightly different story. There are four major components that comprise a homeowner’s monthly house payment. The monthly payment is made up of principal, interest, taxes and insurance, or PITI. Let’s take a brief look at each.
Grasp the entire cost of owning a home
A mortgage payment is the combination of principal and interest – the principal is the actual dollar amount borrowed from the mortgage lender, and the interest is the cost that’s charged for the money borrowed. On a home mortgage loan, the principal portion of the monthly payment reduces the outstanding balance of the loan. The interest is charged on the amount of principal still owed as the loan is slowly reduced. For a more in-depth look, search online for a mortgage loan calculator for an amortization schedule showing what portion of the monthly payment will be applied to principal and what amount goes toward paying interest.
The taxes in the PITI acronym are real estate property taxes. The property taxes are determined and assessed by the county or municipality in which the home is located. While real estate taxes vary throughout the country, most experts agree the average tax bill equates to between 1%-1.5% of the value of the home. Real estate taxes are payable annually, however, depending on the type, amount and loan-to-value ratio (LTV) of the mortgage lenders may require you to include 1/12 of the estimated property taxes in each monthly payment. When the taxes are due and payable, the lender will pay the taxes out of the escrow fund.
Insurance coverage is a requirement by most every mortgage lender. The lender will require the borrower to have sufficient coverage to repair or rebuild the home – their collateral, or security for the principal they loaned – in the event of a fire or other peril. As is the case with real estate taxes, insurance premiums can also be required by the mortgage lender to be paid monthly into an escrow account.
Lastly, here’s another of our Boston area home buying tips designed to help understand the full cost of home ownership. If a prospective purchaser is considering buying a condo, there most likely will be an additional component to the PITI mentioned above: Monthly Homeowners Association (HOA) dues. The HOA fees help pay for those areas of the condo complex that are for the benefit of all the owners or residents. Examples are parking lots, landscaped areas, pools and clubhouses. In addition, the fees collected are designed to pay for routine maintenance such as painting the building’s exterior or replacing the roof. While most HOA fees are for condo complexes, more and more neighborhoods with common areas requiring upkeep and maintenance are forming homeowners associations, which will require dues.
Understand the tax benefits of owning a home
One of the most important Boston area home buying tips to be aware of involves your income taxes. Aside from the annual appreciation most homes enjoy, the most popular advantage of homeownership is the tax savings. Mortgage loan interest and real estate property taxes can be deducted from your adjusted gross income on your income tax returns each year. That, of course, reduces your taxable income – and your resulting tax liability.
Know the comparison math
A popularly used relationship – and argument for buying a home versus paying rent – is the cost comparison of what a homeowner pays in PITI and what a tenant pays in monthly rent. While in theory the concept is good, the most accurate comparison is to analyze the after-tax savings of owning a home versus renting. For example, a $300,000 home may cost (after taxes) $1,215 PITI each month. Compare that to an apartment or home that rents for $1,200. On the surface the math may imply purchasing a home is a better investment. However, remember this illustration is based on a down payment of 20%, or $60,000.
Understand mortgage options and programs
Among vital Boston area home buying tips is how to best and most affordably finance the purchase of a home. While 20% has traditionally been the amount most Americans assume is needed for a down payment, it’s largely a misconception. There are loan programs available today for borrowers with as little as a 3% down payment. As mentioned above, depending on the type of mortgage loan and the LTV ratio, a borrower will have to pay their property taxes and insurance premiums each month into an escrow. In addition, if the down payment is less than 20% or if the LTV ratio is more than 80%, private mortgage insurance will be required. Mortgage insurance protects the lender against the borrower defaulting on the monthly payments. Annual mortgage insurance premiums cost roughly .85% of the mortgage amount, so that needs to be figured into the monthly payment in addition to PITI.
Using the example of the $300,000 home above, the monthly PITI (and mortgage insurance) would be roughly $1,995 with a 3% down payment with a 30-year fixed rate mortgage based on current interest rates. After taxes and all deductions, the total monthly housing cost would be around $1,600. Best of all, the down payment would only be $9,000 – plus whatever loan closing costs the purchaser would be required to pay.
Know you credit score inside and out
Since credit scores are very important when it comes to qualifying for the lowest interest rates on home mortgages, it’s important for prospective homebuyers to know as much about their credit as possible. If you’re a first time homebuyer and only have a few accounts, consider opening one or two new accounts. Be aware, however, that your credit score may decrease from 10-15 points when you open an additional account. Over time, though, as you demonstrate a good repayment history the score will increase. Just understand, this takes time, it doesn’t go up in a week or a month.
Read more about home buying tips in the section of articles on Boston Area Home Buying Tips just below our Boston Real Estate Categories in the column to your right. Remember, we also post tips daily on Facebook and Twitter. Check us out there, too.