Homeownership is a major purchase and is often one of the largest investments you will make during your lifetime. Although everyone’s individual circumstances will determine if buying a home makes good financial sense, we aim to provide you with some things to think about when determining if now is the time to buy, and how much house you can actually afford.
Fixed Interest Rate Loans
Rate remains the same from the start of repayment until the loan is paid off in-full
The most conservative borrowing method
Ideal during a rising interest rate environment
Adjustable Rate Mortgages (ARM)
The borrower gets a discounted fixed rate for an initial period (3, 5 or 7 years) and then the rate annually adjusts up or down based on a benchmark used by the bank (prime, LIBOR)
The interest rate adjustment has a limit in terms of how low or high the rate can go year to year, as well as an overall maximum cap and minimum floor in order to prevent things from getting out of control
Ideal during a flat or declining interest rate environment
Variable Interest Rate Loans
Like an ARM, but not the same
The interest rate adjusts up and down on a monthly basis - often tied to the prime lending rate between banks
Most aggressive option for borrowing
Ideal during flat or declining interest rate environment
Principal – the balance that is owed on your loan
Interest Rate – the cost of borrowing, charged as a percentage of the balance owed
APR – the cost of borrowing plus the additional fees incurred to obtain your loan
Loan Term
Number of years it takes to back your debt
The most common mortgage payment periods are 30 years and 15 years
Shorter time periods come with higher payments, but the borrower gets a larger percentage of each payment applied to the principal balance
Long-term loans carry lower payments but are significantly more expensive over the long run because much of the payment in the early years is interest
Housing Payments = 28% or less monthly gross income
Includes: mortgage payment, property taxes, homeowners insurance, private mortgage insurance (PMI), HOA dues, CDD fees
Example: $100,000 gross income --> max housing payment = $2,333/month
Debt-to-Income Ratio (DTI) = 36% or less monthly gross income
Includes: housing payment, credit cards, cars, and student debt
Example: $100,000 gross income --> max DTI = $3,000/month
Other Helpful Linked Resources:
| Rate Type | For Who? | Differentiating Features | |
|---|---|---|---|
| Conventional | Fixed, Adjustable | Borrowers with good credit & higher income |
|
| FHA | Fixed, Adjustable | FHA |
|
| VA | Fixed, Adjustable | Veterans |
|
| Home Equity | Fixed |
Borrowers who prefer a fixed payment and are worried about rising interest rates |
|
| HELOC | Variable |
Borrowers who want payment flexibility and the ability to borrow on an as-needed basis |
|
Private Mortgage Insurance (PMI) - An insurance premium that your lender may require you to pay to protect them in the event you default on the loan.
Lenders typically require PMI if your down payment is less than 20%.
For example, if you put down 20% you will not have to pay PMI, but if you put down 10%, you will have to pay PMI until your equity in the home reaches 20%.
It is important to note that the Homeowners Protection Act requires lenders to automatically cancel PMI when your equity in your home equals 22%. In order to avoid paying PMI for that extra 2%, you are responsible for contacting the lender when your equity reaches 20%! It doesn’t seem like huge difference, but why pay more when you don’t have to?
PMI premiums can range from .55% - 2.23% (average = 1%) of the original loan amount per year.
PMI premiums are usually added to your monthly mortgage payment. However, some lenders may require paying PMI out-of-pocket as a lump sum at closing, or a combination of an upfront payment followed by future monthly payments.
Factors that determine your PMI premium:
Loan amount – Since PMI is paid as a percentage of the loan amount, the more expensive the house the higher the cost of PMI.
Credit score – PMI is like most insurance policies in that it is based on the perceived amount of risk taken by the lender. In other words, the lower your credit score, the greater the risk, which increases the cost of PMI.
Debt-to-Income ratio (DTI) – This is a ratio that compares your total monthly debt payments to your total monthly gross income. Like a credit score, it is a measure of risk taken by the lender. A higher DTI results in a higher PMI premium.
Loan-to-value ratio (LTV) – This is a ratio that compares your loan balance to the market value of your home, and is usually stated as a percentage. In other words, the smaller the down payment, the higher your LTV ratio. A higher LTV will result in a higher PMI premium.
How to Remove PMI
Refinance your home – if you refinance your home and your new mortgage is less than 80% of the home value, you can contact the lender to cancel your PMI premium. Before doing so, it is important to calculate the cost of the refinance and the cost of remaining PMI payments to make sure it makes sense.
Credit Score Ranges
Bad: 300 – 629
Fair: 630 – 689
Good: 690 – 719
Excellent: 720 – 850
Government regulation requires that nationwide credit reporting agencies provide you with an annual free credit report upon your request. Most credit card companies have features that keep you up to date with your credit score, and there are plenty of online tools that offer free credit reports. We advise caution when using third party websites that aren’t found through the FTC website. The FTC website is AnnualCreditReport.com
Property Taxes - taxes based on the current market value of your home, including land. The county will usually collect property taxes on a semi-annual basis by assessing an annual mill rate.
Jacksonville Area Property Tax Rates (as of Oct. 2019)
Ponte Vedra = 1.088%
Nocatee = 1.159%
St. John’s County = 1.088%
Duval County = 1.047%
Homeowners (HO) Insurance- A type of insurance that generally covers damage to the property. In addition, liability and legal responsibility towards other people are covered for any injuries and property damages caused by the policyholders, their families, and their pets.
Quick Method for Estimating the Cost of Your Homeowner’s Policy
Multiply 0.35% by the home value
Example - $400,000 home à estimated HO policy cost = $1,400
4 Essential Types of Coverage Included in a Standard Policy
Structure of home
Coverage of Personal Belongings
Liability Protection
Additional Living Expenses
Average Cost of Common Home Repairs:
Roofing – This can be a major cost down the line, so making sure that you are aware of the condition of the roof before you purchase the home is important. Also, be sure to ask how a new roof was installed, sometimes to save money, homeowners may decide to put in a new roof without removing the old one. This will result in extra costs for you since the roofers will now have to remove 2 layers of roofing before that can install a new one.
Repair a roof = $650
Install a new roof = $6,600
Note, that these costs can vary considerably, depending on type of material is used and the size of the home
Painting exterior / interior of home = $2,500 / $1,650
Water Heater
Install = $900
Repair = $500
Plumbing Pipes = $1,100
A/C Units
Install = $5,200
Repair = $300
Decks
Build a deck = $7,000
Repair a deck = $1,400
Tree / Shrub Removal = $650
