Understanding Escrow Payments
PITI
The total cost of a mortgage has four
elements:
-
represents the amount you borrow,
which has to be repaid over time.
-
is the cost that lenders charge
for the use of their money during your repayment period
is an assessment that local governments
collect on property to pay for
local services. Property tax rates
will vary by location and can
affect your total cost and affordability
-
will be required
to replace the value of the loan in
the event of a disaster such as
fire, earthquake, flood, etc.
These
four cost components
equals the total monthly mortgage payment:
Principal
+ Interest + Taxes + Insurance (PITI)
=
Total Cost of Your Mortgage Loan
Many times buyers ignore these additional
costs when figuring how much of a
home they can afford.
PITI is part of the formula
that lenders use when calculating
your affordability ratios.
see
our discussion qualifying for financing
Property taxes
and insurance costs must be collected
and paid when they are due.
In most cases, lenders will make the
collection by allocating each month
to your mortgage payment the amount
you need to pay for taxes and insurance.
These collections
are placed in escrow, a depository account
that the bank manages.
Your total monthly payment will include
payments for real estate taxes, insurance,
and Private Mortgage Insurance (PMI)
and other items that are placed in escrow
and used to pay taxes, insurance, PMI
and other items on your behalf when
they come due.
Note that the escrow
portion of your monthly payment may
increase or decrease,
depending
on the change of your taxes and insurance
assessments.
If your mortgage does not have an
escrow account, you will be required
to pay your taxes and insurance separately
and show proof of payment to your lender.
Local Property Tax
Your county and
city may levy taxes on your property.
These taxes pay for government services
such as schools, roads, police, and
other community services.
Information on property tax use:
www.freeadvice.com
The annual tax
is usually calculated as a percentage
(factor) of your property's appraised
market value.
For example, an assessment may look
like this:
- $0.94 per $100 in appraised value
- this calculates into a tax factor
of 0.94% on the appraised value of
your home
Contact your local community
and county officials to determine your
county and city tax factor.
Lookup county and city governments:
www.statelocalgov.net
Many of these local
real estate taxes may qualify for tax
deductions.
Check with your tax
advisor for more information.
Deductibility of real estate taxes:
www.irs.gov
Publication 530: Tax Information for
First-Time Homeowners:
www.irs.gov
Download Publication
530:
www.irs.gov/pub/irs-pdf/p530.pdf
Download IRS1040, Schedule A: Itemized
Deductions:
www.irs.gov/pub/irs-pdf/i1040sa.pdf
At your home closing,you will be required to prepay up to
one year's cost of your property tax.
Then each month, your loan payment will
include 1/12 of the annual property
tax that will be deposited in your escrow
account until the property tax payment
is due.
your input will be used to calculate
your monthly escrow
below
Home Owner's Insurance
You may be required
to carry hazardous insurance on your
home
in the event of a fire,
flood, disaster, and any other natural
disaster that destroys or partially
destroys your home.
The insurance will protect your investment
(and the lender's) and repair any damage
that may occur. The annual premium may
vary depending on your home area and
location. You must provide proof of
insurance before closing and settlement.
At your closing,
you may be required to prepay up to
one year's cost of hazardous insurance.
Then each month your loan payment will
include 1/12 of the annual hazard insurance
premium to be deposited in your escrow
account until payment is due.
input will be used to calculate your monthly escrow
below
Other Money Costs
Other Costs:
There may be other
associated costs that may be included in your escrow payment such as
Private Mortgage Insurance, home owner's association fees, tax liens
if any, etc. Check with your real estate
agent or your legal council to determine
what other charges may apply.
Private Mortgage
Insurance (PMI) is mortgage default
insurance that is required for all conventional
mortgage loans with less than a 20%
down payment.
It is designed to pay the lender a portion
of the outstanding balance of a loan
in the event the homeowner defaults.
for more information about PMI: about
PMI
(links to our home mortgage center at: www.PickMyMortgage.com)
If PMI is required as part of your
loan, the initial annual premium will
be included in your closing costs while your subsequent premiums (1/12th of
your annual premium) will be included
in your monthly mortgage payments and deposited in your escrow account.
You need to check with your lender to
estimate your cost percentage for PMI
if your down payment is less than 20%.
Nationally, the average annual percentage
is around 0.005 of your loan balance.
input will be used to calculate your monthly escrow
below
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