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It’s
a PITI
By Donna
M. Rose
It’s a pity that we have
to pay property taxes, but
unfortunately they are a fact of life. In many articles, advertisements,
and discussions of housing and mortgages, references are made
to "PITI". Each of these letters reference an important
component in the overall expense associated with buying a home.
P=
Principal is that portion of your monthly payment that
is applied to reduce the actual mortgage amount. The amount of
the principal applied to the mortgage increases over time as
the interest amount decreases.
I= Interest is the biggest component of your mortgage
payment. It is the fee the bank receives for having loaned you
money. When you begin to pay off your mortgage, the major portion
of the payment goes toward paying interest charges. But, over
time, as you pay off a typical mortgage (or principal), the amount
of your monthly mortgage payment dedicated to interest declines
and more of your payment goes toward the principal. The difference
between the value of your home and the remaining amount of your
principal is referred to as "equity". Interest can
vary considerably depending on the type of mortgage you have
and current interest rate. New homeowners are most often recommended
to get a fixed rate mortgage (interest rate is fixed over the
life of the loan). Go
to our mortgage calculator.
T= Taxes are just that, real estate taxes a government
charges the public for the provision of its services for a common
good. These property taxes often include the school system, county
services, police and fire departments, municipal services and
infrastructure repair and improvement. Property taxes are calculated
by dividing the cost of providing services by the value of property
throughout a designated area. In New Jersey taxes are an important
factor in calculating the affordability of a home, and should
be researched when a purchase is considered. A more detailed
explanation of figuring property taxes follows. Go
to our municipal tax rate chart.
I= Insurance is usually the smallest component
in "PITI", albeit an important one. In Monmouth County,
many properties fall within the distance of the "100 year
flood plain" (the distance likely to be flooded over the
course of 100 years). It is important to include flood insurance
as you evaluate your insurance options. Flood insurance is often
not included in a comprehensive homeowners insurance plan and
it may need to be purchased separately. Comprehensive insurance
plans and costs do not vary dramatically from one provider to
next, typically it will cost less than $600 per year for a house
valued under $200,000. But you should look very carefully at
what the insurance plan actually does cover, AND the amount of
deductible you will have to pay toward damages before an insurance
company will pay for those damages.
Computing a Municipal Tax
Rate
Figuring the cost of
"T" (municipal tax rate)
in the PITI is pretty much straight forward. In Monmouth County,
there are 53 municipalities and 53 different municipal tax rates
(see chart on pg 11). The cost to you, as a result of municipal
taxes, can be calculated by dividing the value of your home by
100 and then multiplying that number by the municipal tax rate.
For example: if a home has a value of $100,000, your cost for
municipal taxes would be as follows:
$100,000 assessed value divided
by 100 = 1,000 x (municipal tax rate) = annual tax payment and
divide by 12 for the monthly tax payment which is added to your
mortgage as the "T" in PITI. All of the following assume
a home is assessed at $100,000.
Colts Neck with a $1.710 municipal
tax rate $1710 annually or $142.50 each month
Bradley Beach with a $3.101 muni. tax rate $3,101annually or
$258.41 each month
Roosevelt with a $4.928 municipal tax rate $4,928 annually or
$410.66 each month
It is obvious from this example
how much of an impact the tax rate in a given municipality can
have on the affordability of a home. A home of the same value
located in different places could windup costing considerably
more, as much as $268.00 more each month as in the foregoing
example.
Understanding Assessed Value
Another important factor
to consider in reviewing materials for the purchase of a home
is the assessed value of the property. In many cases the value
assessed by a township may be more or less than what you are
actually paying for that home. So if a property owner claims
they are only paying $2,000 a year in taxes, but the appraised
value is much lower than the purchase price, it is important
to independently calculate your future tax payments based upon
your purchase price.
Assessed value is often adjusted
upwards when a new purchase is made. It is important for you
to contact the municipality prior to making your final decision
to buy: property tax increases or decreases are proposed one
year in advance of their implementation.
If you have specific questions
regarding PITI we would love to hear from you. Please direct
your questions or comments to:
Step Up
Monmouth Housing Alliance
59 Broad St.
Eatontown, NJ 07724
e-mail housingall@juno.com
fax (732)389-3163
Donna M. Rose is the Executive
Administrator of the Monmouth Housing Alliance, a nonprofit developer
and provider of affordable housing for people who need it.
If you would like to compute
your mortgage, go to
our mortgage calculator. Then, to see how much a municipal
tax payment will be for that home, and needs to be added to your
monthly mortgage payment, go to
our municipal tax rate chart.
This article appeared in the
August, 1997 issue of Step Up. |