Are you considering giving up rent to buy a new home? One thing that can help you with this decision is understanding the differences between paying rent and paying a mortgage. The most important difference is where your money is going. When you pay rent, you are basically giving that money away. When you pay your mortgage, it is like you are depositing cash into a giant savings account. Every monthly payment you make on your mortgage increases your equity in the home. When it comes time to sell, you will get that money back.
Another difference that is important to understand is the components included in your monthly mortgage payment. With rent, you are just paying a once a month fee to live in the home. A mortgage payment is comprised of several different factors known as P.I.T.I.
- Principle-Principle is the largest portion of your monthly mortgage payment. This portion of the payment is going directly towards your loan balance.
- Interest-The interest is the cost of borrowing money for the home. This portion of the payment will depend on your interest rate, which is determined based off of your credit score, debt to income ratio, and loan program.
- Taxes-Anyone who owns property has to pay property taxes every year. This annual fee is broken out into 12 months and included in your monthly mortgage payment.
- Insurance-Every home owner is required to get home-owners insurance. This insurance policy protects your home and will typically cover the costs of accidents related to weather, natural disasters, fire, and theft. The annual premium is broken out into 12 months and included in your monthly mortgage payment.
The more you can educate yourself on home ownership, the smoother the transition will be when it comes time to purchase your first home. If you are able to pay rent month after month, it is very likely that you can qualify for a mortgage with a similar monthly payment. Don’t throw any more money away! Talk to one of our mortgage professionals today to see how much you qualify for.