2006

In this Issue:

Tactics for Buying a New House…
The REAL Cost of a Mortgage
Game Plan for Fall Cleanup

Tactics for Buying a New House
As the Housing Market Cools

Sales of new single-family homes fell 4.3% in July from June, the latest sign that the housing market is cooling. An earlier report showed home-builder confidence fell in August, with the National Association of Home Builders/Wells Fargo Housing Market Index dropping to 32 — its lowest point since February 1991. An NAHB index rating below 50 means that more builders expect "poor" sales in the next six months than "good" sales.

WHAT TO DO: If you're shopping for a new home, there are ways to get more house for the money.  Haggle.  Some builders are offering no-money-down offers, financing assistance, and promises to match housing-market prices if prices dip before closing.  Watch for price reductions from builders on completed homes or nearly completed ones.  With cancellation of home-building contracts rising, such deals may be easier to come by. Ask for incentives or upgrades — to draw buyers builders are offering free upgrades on everything from landscaping to granite countertops.

The REAL Cost of a Mortgage

The total cost of a mortgage is comprised of four main elements:

1. Principal
2. Interest
3. Taxes
4. Insurance

PITI is part of the formula that mortgage lenders use when calculating your affordability ratios. Many times home buyers ignore these additional costs when figuring how much of a home they can afford.

Principal
Principal represents the amount you borrow, which has to be repaid over time.

Interest
Interest is the cost that mortgage lenders charge for the use of their money during your repayment schedule.

Taxes
Taxes are 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.

Insurance
Homeowner's Insurance will be required to replace the value of loan in the event of a disaster such as fire, earthquake, flood, etc.

Understanding Escrow
Property taxes and insurance costs must be collected and paid when they are due.  In most cases, mortgage lenders will make the collection by allocating the amount you need to pay for taxes and insurance each month to your mortgage payment.  These collections are placed in escrow, a depository account that the bank manages.

Your total monthly mortgage 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 in the future.  

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 Taxes
Your county and city may levy taxes on your real estate property. These taxes pay for government services such as schools, roads, police, and other community services. The annual tax is usually calculated as a percentage (factor) of your property's appraised market value.

Hazardous 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.

Other Costs (PMI)
There may be other associated costs that may be included in your escrow payment such as Private Mortgage Insurance, tax liens, etc. 

Private Mortgage Insurance (PMI) Private Mortgage Insurance (PMI) is mortgage default insurance that is required for all conventional mortgage loans with less than a 20 percent down payment.  It is designed to pay the lender a portion of the outstanding balance of a loan in the event the homeowner defaults.

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 into 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 percent.  Nationally, the average annual percentage is around 0.005 of your loan balance. 

Game Plan for Fall Cleanup