Updated: Feb 26, 2021
So, you want to take the plunge and buy a piece of the American dream, your own place!
You probably have questions like:
What are the expenses involved as compared to renting or living with my parents?
What price range can I afford?
How does the process work?
We will cover all of these questions and more in this Blog but let’s start with some of the basics: what does it take to invest in a new house or condo for the first time.
The four most basic expenses you will need to cover on an ongoing basis are:
The above four expenses are often abbreviated PITI, which I remember by saying:
“Isn’t it a PITI I have to pay these expenses every month!”
Principle & Interest
Unless you can buy a house for cash (tough to do), you will need to take out a loan. Your loan payments are typically equal payments every month just like a car loan with some of the money going towards principle (paying back the actual loan amount) and some of the money going towards interest that the bank (or other lending institution) charges for having given you the money upfront to give to the seller. You would be surprised over the life of a loan how much extra you really pay when you add these 2 together (we will do this math in a later blog post).
On top of Principle and Interest, there are 2 other regular monthly payments, often bundled into the monthly fee you pay your lender and you have to budget for to make this big move.
These are real estate taxes assessed by your town. This money goes toward the overall town budget and is used to fund public services like schools, libraries, police, fire departments, roads, snow removal, sewers etc. Everyone who owns a house pays taxes to the town based on the value of your house (or condo) and the tax rate (sometimes referred to as the mil rate).
In order to protect the lender (in case you don’t pay your loan), they usually require some form of insurance. For conventional loans, this insurance is called Private Mortgage Insurance (PMI) and is required for most loan where you put less than 20% down.
So, now you know some of the most basic expenses involved in buying a home - PITI!
Knowing I need to pay these 4 expenses monthly, how do I figure out how much house I can afford?