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Let’s start by covering the Top 5 factors that drive a mortgage payment:
1. Sales Price
The sales price is what you agree to pay the seller. It could be higher or lower than the appraisal value or listing price, depending on the market. If the market is white-hot (like it has been, with high demand and low supply) you might have to pay more to beat out other buyers. If your realtor is a wizard (like a local expert!), they’ll be able to help you win.
2. Loan Amount
The loan amount is what you’re approved for by your mortgage lender (ahem, this guy, Mark). It’s important to know the phrase “Loan-to-Value” (LTV). The LTV is the percentage of the loan compared to the value of the home. When you’re refinancing, simply calculate your LTV by dividing the loan amount by the home’s appraisal value ($400K loan / $500K home = 80% LTV). When you’re buying a home, LTV can be a little more complicated, since it’s calculated using the LESSER of the sales price or the appraised value.
3. Property Taxes
The property tax is what your government (state, county, region, or — yikes! a combo of those) imposes based on the value of your property. A lot of folks just got hit with surprisingly high property taxes, because the taxes are catching up with the higher home values. Check this out for more info!
4. Homeowners + Mortgage Insurance
Homeowners insurance protects you, the borrower, and mortgage insurance protects the lender if you don’t repay your loan. Homeowners insurance is crucial because it covers property damage caused by fire, flooding from pipe damage, earthquakes, etc. Mortgage insurance (PMI) is an expense you can avoid with a 20% down payment. But keep in mind, mortgage insurance today isn’t your parents’ mortgage insurance. Putting less money down when buying a home and paying the mortgage insurance can be a great way to maximize your return on investment.
5. Then, finally… Interest Rate
Rates are the LAST thing driving the mortgage payment – NOT the first! People operating out of fear have been freaking out about rising rates, without considering that they are normalizing… YES, today’s rates are higher than the amazingly low rates we’ve seen since 2020, but they’re still low compared to 8% (2000) or 13% (1980).
Here’s the takeaway: rarely does interest stop you from being able to afford a home. On a $500K loan, a 0.5% higher rate only changes the payment by $150/month. Your Starbucks addiction could increase your monthly budget more than your interest rate!
So don’t let fear stop you from purchasing a home. If you’re ready to make one of the best investments of your life and start building generational wealth, let’s chat. I want to help you reach new heights.