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How to Calculate Payments for a First-Time Home Buyer

by K.C. Hernandez

As a first-time home buyer, a mortgage, property taxes and homeowners insurance will likely be foreign expenses to you. Taking on this financial obligation requires serious consideration and calculation. You'll need to determine the monthly payment you can comfortably afford before signing a mortgage agreement. To accurately calculate the monthly payments of a first-time buyer, understand the features of your loan program.

Principal and Interest

When you take out a mortgage, you commit to paying the lender principal and interest for a specified amount of time -- typically 15 or 30 years. The type of loan you get affects how much principal and interest you pay each month, as does the loan's interest rate. For example, a 15-year loan requires higher monthly payments because you pay it off twice as fast as a 30-year loan. Other loan features, such as a fixed interest rate or adjustable rate, impact how the lender calculates your payment over the loan's term. If adjustable, your loan has a low initial payment that adjusts after one to ten years. Additionally, some loans carry an interest-only feature which allows you to forgo paying principal by deferring it for a certain number of years -- usually five or 10.

Taxes and Insurance

The other portion of your monthly payment consists of property taxes and homeowners insurance, which are due annually. Lenders require you to pay 1/12 of the annual taxes and insurance premium each month along with the mortgage principal and interest if you put down less than 20 percent. If not, you must budget to cover the expenses as they come due. Insurance premiums typically range from several hundred dollars to thousands, depending on whether you choose additional protections such as earthquake and flood coverage. Property taxes vary by state and locale and newer developments typically assess additional taxes for schools and other local services. State property taxes usually range between one percent and two percent of the home's sale price and may change due to periodic reassessments by your local tax authority.

Calculation Example

Suppose you finance a $200,000 loan with a fixed interest rate of 6 percent over 30 years. You choose a principal-and-interest payment and choose to pay your taxes and insurance along with the mortgage each month. By using a mortgage amortization calculator, which you can find online, you calculate a principal and interest payment of about $1,199. Suppose that your property taxes are based on a 1-percent tax rate and a $250,000 home value. Your annual taxes equal $2,500 or about $208 per month. Add to this a homeowners premium of $700, or $58 in monthly installments. The total housing payment for your first home is about $1,465.

Other Considerations

You may have to add Mello-Roos taxes if you buy in a new development which assesses these special taxes. You also may have to pay homeowners association fees if you buy a condo or buy a home in a planned development. You pay Mello-Roos along with your regular property taxes and pay your HOA dues directly to the association, rather than to your lender. With less than a 20 percent down payment, you may also have to pay for mortgage insurance, which covers your lender if you default. The cost varies by loan program, but is usually .5 percent to 1.5 percent of the loan amount. For the sake of budgeting and loan qualifying, you must consider these payments as part of your total housing payment when applicable.

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