2.5 Mortgages: Part II – Calculations

P&I Payments

When you borrow money, you must pay back what you borrowed (principal) plus extra (interest) to the lender. While your actual mortgage payment will be higher (discussed shortly), we will begin by reviewing the loan payment problems from last module.

PMI

When you are unable to produce a down payment of 20%, banks generally require private mortgage insurance or PMI. Once a borrower surpasses 20% equity, they can stop paying for PMI. As mentioned earlier, PMI is meant to cover the costs of foreclosure for the bank in the event you are unable to continue to pay for the house.

Property Tax

Jurisdictions will levy a tax on the assessed value of a property. It should be noted that the assessed value is not necessarily the market value. Some jurisdictions only assess at a certain percentage of the market value.

Additionally, homeowners generally have to pay multiple property taxes. In Pennsylvania it is typical to have to pay property taxes to your city or township, your county, and your school district. Some of these bills are combined (generally the city/township and county) or each bill may be separate.

As mentioned, property tax is generally given in mills, which is thousandths of a dollar. So if the tax rate is 20 mills, then for every dollar of appraised value, you owe $1. Some examples follow…

Tax rates can vary greatly between municipalities, school districts, and counties. For instance, the total tax rate for a house in Peters Township is around 18 mills whereas the total tax rate for a house in Jefferson Hills is around 30 mills. That means that a $400,000 house in Peters Township will cost you $7,200 per year whereas the same house in Jefferson Hills would cost you $12,000 per year. That comes out to an extra $400 per month for the house in Jefferson Hills.

PITI

As mentioned earlier, your mortgage payment is generally more than just the principal and interest. To prevent non-payment of taxes (which would put the ownership of the property in peril) or non-payment of property insurance (which would be disastrous for the bank if something happened to the property and the insurance wasn’t active), banks will generally require you to pay money into an escrow account. An escrow account is simply an account where your money is held. The bank has access to this account and will use the funds to pay your property taxes, homeowner’s insurance, and PMI. Therefore, the actual amount you pay each month is called the PITI payment which stands for Principal, Interest, Taxes, and Insurance payment. We will run through a few examples, but before we do it is important to point out that when determining what you can afford, you need to look at the PITI and not the P&I. As we saw in the property tax section, houses with the same price tag could have very different PITI payments based on the tax rates.

Amortization Schedule

We talked about amortization schedules in the last module, but let us take a look at the initial payments for a mortgage.