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How piti affects your home purchase budget

How PITI Affects Your Home Purchase Budget

How PITI Affects Your Home Purchase Budget

There are lots of factors that you normally consider when deciding on the budget that is required to purchase a new house. The dream that you have had for so long should no be derailed because you failed to calculate on a few factors, which will otherwise catch you by surprise at a later period. Banks also take these factors into consideration before giving you the mortgage loan. PITI stands for Principal, Interest, Taxes and Insurance and form the most important components of a mortgage loan. These are what you shall be paying, either to the bank or to the government, after you have purchased a home.

Of the four components listed above, principal and interest are the basic components of any loan. While the buyer shall certainly be aware of these common components, he normally fails to calculate the impact that taxes and insurance have as far as his repayment schedule is concerned. This is where the buyer miscalculates and ends up defaulting. But banks are more careful in this regard. They have a formula which takes into consideration all the four components. The calculation that they follow is quite simple. They ensure that the asset mortgaged by the buyer should be able to cover, in the longer period of time, all costs of the loan, adding up the four components over the years to come. This ensures that even if the buyer were to default, the cost can be recovered by sale of the property, so that the banks’ margins are not hit.

Most buyers are spot on when they calculate the principal and interest components of the loan and incorporate these into the budget, but falter when they calculate the taxes and insurance, as these are subject to government regulations. Banks on the other hand are more accurate in these calculations, simply because they are more knowledgeable on these subjects and can also give you an approximate cost that the house would have appreciated to after a certain period of time. This helps them to know if they can make a profit by way of sale of property, if the buyer defaults.

This is a good method and can be adopted by the buyer as well, as it helps him to calculate what additional amount he shall be paying the bank, in case of the mortgage loan, which includes the interest as well as other expenses, related to insurance and taxes. This gives him a realistic idea if he were to sell the property himself, after the loan is cleared. For a business minded individual, who wants to make money through the real estate market, this is good tool.

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