PITI+L= the New Paradigm in Home Cost

When I am working with a Berks County home buyer it is important for them to tell me what they are looking for. They normally do this by giving me a list of things they desire. These things include location, number of bedrooms, number of baths, etc… The home buyer will also give me a price range like $200,000 to $225,000. For me to competently assist the home buyer I must also ask questions. One of the most important is “will you be financing your home purchase?” If the answer is “Yes” it leads me to consider a plan of action for them that will not only maximize their value but enhance their lifestyle as well. The example is as follows… The $225,000 represents the upper end of their purchase limit. They meet with a mortgage lender who tells them the interest rate is 4.5%. If the home buyer has 5% of their own funds ($11,250) they will have to finance $213,750. The principal & interest payment on this loan amortized over 30 years is $1,083.04. This is the “P & I” part of our equation. The next part of the cost equation are the property taxes. This number varies from house to house. For our example we will say that the taxes are $5,500 per year (including school, county & municipal). This would give us a cost of $458.33. Amazingly, this is around 42% of the P & I payment. This what happens when interest rates drop and become attractive but Berks County taxes rise. I hope our elected officials are listening! This is the “T” part. The insurance part of the cost equation harbors two separate values. One is hazard insurance, the other is private mortgage insurance (PMI). Hazard insurance in our example should be about $600 per year or $50.00 per month. PMI is a bit more complicated. It is a percentage of the loan amount divided by 12 months. In our example it is $128.25 per month. If a Berks County home buyer has 20% down and loans 80% there is no need for PMI. For our example we need to add $178.25 for the insurance or “I” part of the equation. Our total monthly payment is $1,719.62. This represents a cost factor of $8.05 per $1,000 borrowed. We arrive at this figure by dividing the amount toe Berks County home buyer is financing ($213,750) by the total Principal, Interest, Tax & Insurance payment (PITI) of $1,719.62. It is at this point when some buyers state that they really did not want to go past $1,500 a month. Aha! Now we are getting somewhere. It is not really the price of the home but the cost of the money and expenses. We are buying money! So where does the “L” fit? It is simple…Life (or cost of living). The following example will offer an explanation… Recent studies show that more people are moving closer to urban areas than suburban areas. This is the first time in over 50 years that this dynamic in habitation has taken place. People are moving closer to amenities, their family & social sphere and necessities. It seems that the cost of fuel is catching up with society. It is now a part of our financial life. The less we are in our vehicles, the more we save. The savings goes far beyond cost but into life. What is your time worth? Say you move 10 miles closer to your job. The average work year is about 250 days. This is 5,000 less miles drive per year. If your vehicle gets 20 miles per gallon you will save 250 gallons of gas. At $3.65 per gallon that is a savings of $912.50. If you divide this by 12 months it is $76.04 per month. Using our $8.05 per $1,000 borrowed, this is like saving $9,330.00 on your home purchase. If you paid the savings of this one event on the principal value if your home it would reduce the term by several years. This is just one example of where the total cost of living and the value of your time should be considered when buying your next Berks County Home. It is a point I share with every Berks County home buyer I work with. If you like these weekly articles please visit my Facebook Business page at www.facebook.com/BerksCountyPARealEstate and LIKE my page. Or visit JeffreyHogueRealtor.com and comment on the article. It is nice to know someone is listening! Jeffrey C. Hogue