August, 2020 - California Platinum Loans

So, how do these payments work?

First, the principal represents a portion of the amount you’re borrowing to pay for the house you want to buy. Interest represents the portion of your house payment that pays the interest the lender is charging on your loan.

For a 30-year fixed rate mortgage or a 15-year fixed rate home loan, the monthly payment stays the same over the course of the loan. But when the loan starts out, you pay primarily interest. Over time, you will pay higher amounts of principal, and lower amounts of interest. That is how people who have had mortgages for a long time pay down the mortgage, and build equity in their home.

Taxes and insurance will vary depending upon your home’s purchase price, and the mortgage insurance (MI) you will be asked to pay. This amount varies depending on the type of loan you have and its requirements. FHA loans, for example, will always include a mortgage insurance payment. If you are able to put 20% or more as a down payment, you may be able to find mortgage loan programs that don’t require mortgage insurance.

Property taxes will vary and they are calculated based on the purchase price of your home. You may also have Mello-Roos taxes in California, which are taxes related to bond initiatives in specific areas that are paid off over time. You lender will collect these funds and remit them on a schedule to the proper government authorities.

So, your monthly house payment will really be made up of four different payments: mortgage principal, mortgage interest, mortgage insurance, and property taxes. Those are the elements of “PITI.”

It can be exciting to see mortgage calculators with much more affordable payments than you could be paying in rent. With the average rent in California estimated at $2,800 by Zillow, home mortgage calculators that show you could buy a townhouse or condo for half this price look appealing. But not all mortgage calculators calculate your true monthly house payment.

Don’t forget property taxes and Mello-Roos

Taxes and fees are often left out of online mortgage calculators. In California, many homes can be eligible for special tax assessment districts called Mello-Roos taxes. These taxes pay for specific improvements to a neighborhood or community.

Some home mortgage loan calculators also leave property taxes off their totals. California’s Proposition 13 sets the base property tax rate at 1%, which means your property tax for the first year you buy and live in your home will be 1% of the purchase price. Local counties can increase their assessment by up to 2% a year. If you make improvements to your property, your property can be reassessed and you’ll receive a new bill from the county assessor.

Homeowners Association Fees

If you’re buying a condo or a single-family home in a planned or gated community, you will have homeowners’ association fees. You’ll also have something called “CC & Rs,” which stands for covenants, conditions, and restrictions. While CC & Rs don’t always add money to your house payment, homeowners’ association dues will be an additional monthly cost for you to add to your monthly payment.

Mortgage insurance and home insurance

Some home loan programs automatically include mortgage insurance in your monthly payment, but online mortgage calculators can miss this amount. Mortgage insurance also doesn’t insure your home and belongings. It is exactly what it says: insurance that will pay the lender in case something happens to you and you can’t make your payments. Homeowners’ insurance is the policy that will pay for damage to your home in case of fire, theft, or storms. In California, some home policies have become very expensive due to the risk of fires. Earthquake policies are always “extra” and may be costly depending on your home’s location.

With rents rising in nearly every California community, buying your home is an attractive financial choice. Just be sure to include all costs when you’re calculating the home you can afford. A qualified mortgage and real estate professional can let you know exactly what your payment will be as you go on your mortgage loan and home buying journey.