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Home Purchasing

When Do You Pay More Than The Cost?

As we continue in our First Time Buyer Education Series, please be sure to Never confuse the amount of your monthly payment with the actual cost of owning. A typical monthly payment includes principal, interest, taxes, insurance and, in some cases, mortgage insurance.

 Example:

$250,000 home

$4,000 per year taxes

$800 per year insurance

$200,000 30 Yr. Fixed Loan at 4%  =

The principal portion of the payment is not a cost; it’s a reduction of the loan balance. With each payment, you increase your equity by the same amount. For our example, the average principal installment for the first year is $294/month.

Owners who itemize can usually deduct the cost of interest and real estate taxes. For our example, an effective tax rate of 28% would reduce the cost by $279/month. (Avg. 1st yr. mo. interest paid of $661 + taxes of $333.33 x 28% = $279) Always consult with your tax advisor regarding your situation.

 Despite the ups and downs, over the last 50 years, annual nationwide appreciation averages more than 5%. Even using a more conservative rate of 3%, the increase in value represents $625/month.

 That brings us to:

Most of these benefits aren’t realized until you sell, so owners still have to be able to make the regular payment each month. Accumulating equity and earning appreciation take time. Consider the cost of maintenance and repairs, too. But when you think about what you would have paid in rent, it’s clear that owning a home can be a great way to build wealth.

And it’s also clear that the true cost is typically far less than what you might write on a check each month. Contact our team to get numbers specific to your purchase price range. 

Note, this scenario is just an example and not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.

Understanding the HOW and WHY of Escrow Accounts

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The establishment of an Escrow account for your taxes and insurance (sometimes referred to as an “Impound Account”) can be complicated and difficult to understand. Escrow accounts provide for the timely payment of taxes and insurance on your home. This prevents tax liens, loss of property and any lapse of insurance coverage.

The Simple Explanation

As part of your regular mortgage payment, 1/12th of the annual cost is collected. These funds are held and paid out as the bills come due. If taxes are $5,000 and insurance is $1,000 for a total of $6,000 annually, you’ll pay $500 into escrow each month. The balance will build until an outgoing payment is made.

The Full Explanation for Escrow Accounts as they relate to home purchasing in Wisconsin

Fact to Remember About Escrow Accounts:

Some of the funds for “pre-paids” are paid to the billing entity (i.e. insurance company, taxing authority) through the closing and some are put into your escrow/impound account at closing.

The government always requires a two month buffer be added to the escrow/impound account to compensate for the almost-inevitable tax and insurance increases.

You will likely skip a payment; usually the first payment is due more than one month after you close.

With a home purchase, your seller will have to credit you some tax money at closing for the estimated 2014 taxes due through the date of the closing because the full bill is the responsibility of whomever owns the home at the end of the year.

The following will occur at your loan’s closing:

Your first year of insurance will be collected and paid to your insurance company at or before closing (they are only paid once per year; not monthly); if you don’t pay it to your agent prior to closing, we will collect it from you at closing and send your agent a check to pay that first year in full.

We will collect three additional months of insurance at closing (one month because you skip a month before your first payment is made and two months for the buffer – both noted above). One year from closing, after making your payments, you will have 14 months of insurance in your escrow account and then the next year’s renewal bill will come out and be paid thereby bringing your balance back to the two month buffer; then you start over for the next year.

We will collect – if you were closing on June 30, 2014, for example – nine months of taxes from you – six months for the first six months of the year because Wisconsin’s Tax Cycle is the same as a calendar year, one month because you would skip a payment (first payment due 8/1/2014 if closing 6/30/2014) and the two month buffer noted above. However, as also noted above, the seller will have to credit you the taxes due from the first of the year thorough to the date of closing; six months in this example – leaving you with a net collected from you at closing of three months (one month because of the skipped payment and two months for the buffer). Then, in December, there will be 14 months of taxes in your escrow account when 12 months are paid out to the city leaving you again, with the two month buffer plus any overage/shortage due to tax bill changes.

You might find this flyer to also be of use in understanding how it all works. If you have questions, please contact me for clarification.