As a first time homebuyer, it’s important to understand all the costs that go into owning a home. For starters, did you know that your monthly house payment actually includes more than just the principal and interest of your mortgage?
William Bolton, Homeownership Advisor with the Twin Cities Habitat for Humanity’s Homeownership Program, breaks down the various monthly costs of homeownership and how to budget for them:
The Monthly Home Costs
“A mortgage payment wraps up four different types of payments that you make when you make your regular monthly mortgage payment,” says William.
- Principal Payment. This portion of the payment is the actual amount of your loan. The principal payment each month reduces the size of the loan. With each dollar you contribute toward your principal payment, you earn a dollar of equity in your home.
- Interest Payment. This portion pays the bank for being your mortgage lender. This is lumped in with your principal payment to the bank.
- Taxes. This portion of the payment covers property taxes. This can be paid all at once with the principal and interest payment as part of an escrow, or it may be paid separately, depending on how your payment plan is set up.
- Insurance. Along with your property taxes, your homeowners insurance is often paid as part of an escrow.
The easy way to remember these payments is “PITI,” (Principal, Interest, Taxes, Insurance). So, make sure you can afford your PITI before buying a house!
How to Budget for Those Costs?
A general rule of thumb for budgeting is that 50% of your income should be spent on your needs (like your PITI, utilities, grocery bill, etc.), 30% can be used on your wants, and 20% is reserved for your savings.
“When I’m looking at a budget, I’m usually trying to fit my clients into that rule to make sure they’re prepared for homeownership and something unexpected doesn’t throw them completely off their budget,” said William, who plans monthly budgets for families in the Homeownership Program.
With the Homeownership Program at Habitat for Humanity, we build and rehab homes for our clients, or our clients can work with a real estate agent to find a home within their budget on the open market. Our mortgage product helps keep the monthly payments affordable
Interested in the program and how it can help you find a home inside your budget? Visit our Homeownership page to learn more.