Step #3

Step #3

3. Before you actually talk to a mortgage representative know your budget.

Being a property owner is a very different from being a renter. Generally, renters do not pay for water, sewer and real estate taxes (although as to water and sewer this has recently changed under some circumstances in Massachusetts) and some tenants do not pay for heat – and let’s not forget the money for emergency home repairs. Know how much you will feel comfortable paying a month for everything – not just the principal and interest of your payment.

A typical mortgage payment is made up of the following:

1. Principle;


2. Interest;


3. 1/12th of your yearly real estate taxes;


4. 1/12th of your yearly homeowners insurance;


5. Private Mortgage Insurance (if you put down less than 20%).

Also determine how much money you have to put down. Remember, a portion of this money needs to cover prepaids and closing costs too. Even if you obtain a 100% financing or a “no money down” mortgage, you will still need to put some money down for closing costs and prepaids.

Some examples of closing costs that you may need to prepay (the amount varies from institution to institution) are:

1. Mortgage Application Fee;


2. Rate Lock Fee;


3. Attorney Fees (you are paying for the bank’s attorney to draw up the necessary papers – this is not your attorney however. I will discuss this further later on); and


4. Lien Certificate fees.

Some examples of closing costs that you may need to pay for at closing are:

1. Filing fees;


2. Lien Holder Title Insurance; and


3. Reimbursements to sellers.

Then there are prepaids.

Most banks will require you to pay:

1. A full year’s worth of home owner’s insurance prior to closing;


2. Three (3) additional months of home owner’s insurance to set up an escrow account; and


3. Three (3) months of real estate taxes to set up an escrow account.

You may also owe the seller additional monies for:

1. Oil left in the oil tank;


2. Overpayment on real estate taxes (if the current bill has already been paid – you will need to reimburse the seller for your per diem share of the property taxes for that period); and


3. A per diem share of that month’s condo fees (assuming you have purchased a condo).

Additionally, depending on the time of month you close, you may either make a full mortgage payment at closing or pay per diem interest.

Plus, then you have the optional Owner’s Title Insurance Policy (again, more about this later) – and you usually won’t know how much that costs until a few days before closing.

Finally, there are all of your own moving expenses:

1. Moving or setting up the new phone;


2. Moving or setting up the new television services (cable/satellite); and


3. Renting a truck; or


4. Hiring movers.

All of these types of expenses will need to come from the money you have available for a down payment.

In addition to the above costs of ownership, when determining your budget, remember to also keep disposable income in your budget – you will still want to go to the movies every so often.

Continue to Step #4.