Most Newbie Question- What are the components of a mortgage?

14 Replies

?: What are the components of a mortgage, is it only interest, principal, tax and insurance? How do I reduce each one of these costs? Does anyone have any strategies they can share? Any Oklahoma based strategies?

Hey everyone out there in BP-land,

I am a total newbie at real estate investing, and I am about to start shopping for my first home. I want to own a primary residence that I can live and flip over the course of two years. In this time, my goal is to, use buy-hold (BRRR) and buy-flip in my area until I have the ability to pay of my primary residence.
I kind of see owning a home free and clear for the wife and kids to live in as my first challenge as a real estate investor.


So, to that end, does anyone have any solid or creative strategies for reducing the four costs that comprise your monthly payments? 

I should add that we are going to buy our first house on a VA loan, we are trying to raise the 20% to eliminate PMI right now, we are looking right now to purchase a home between 70-90k.

Thanks for your time and attention, I appreciate any advice that is out there!

-Alex 

@Alexander Ray not sure I understand what you are asking really...? In order to reduce costs, you can obviously do work on the property itself, or when purchasing the property try and negotiate on the price/closing costs with your realtor. A mortgage is made up of what is called PITI which is principle interest taxes and insurance.

Well, you could pay your insurance & taxes yourself, which would negate that part of the monthly payment, but would only mean you'd have a balloon cost at some time during the year. In other words, it doesn't save you any money, but does allow you to allocate your funds a little better than being locked into a larger mandatory payment. 

Not all banks will agree to this, especially if you have no track record. I usually pay my own taxes & insurance on anything I refi, but I do this more for my own record-keeping purposes and ease of action, since all of my properties are in the same areas and most have no mortgagor to pay the insurance & taxes.  

@Alexander Ray

Ultimately, to "reduce" the 4 costs you have mentioned, is to buy a lower priced and a small house in a C/D neighborhood. (a small loan) 

But you don't want to do that especially for your family to move in. So you need to balance out what works for your family and your goals. 

The faster you pay down your principal, the less interest you pay overall for the duration of the loan. 

@Alexander Ray Good question! Obviously you can pay down the principle by raising a higher downpayment. You can also sometimes secure a lower interest rate by "buying" points on your loan. I like keeping my insurance and taxes in the payment because its easier on me to keep things bundled.

I would definitely shop around for your loan (try small local banks in addition to big faceless ones) and keep asking good questions.

sorry for the double posts. Can't seem to delete the 2nd one. 

Ok, follow up for clarification-

This is why I am confused. I have been essentially buying minority shares of distressed properties, living in them rent free, and fixing them up for re-sale for about 4 years now. I mostly haven't had rent payments, I've just put cash down, paid for repair and got a cut of whatever profit may have come from it. I was thinking of doing a similar thing with my mother-in-law's distressed property, but with this I would just take over mortgage payments.
When I sat down to do that math, her mortgage was like 1200/ month (rounded) with only about 300 principal/ 100 interest/ 100 taxes. Her insurance is over half her monthly payment and I don't really understand why. It has thrown all of my calculations into question.

So if I am going to buy a 90k house with (hopefully) 20% down, how do I not get killed by insurance? Both for rental property and a primary residence (which will one day be flipped/rented) 

And in addition, how do you factor those PITI monthly payments into your calculations when analyzing a deal?

Hi @Alexander Ray ,

  • No PMI on VA loans even with 0% down.
  • Homeowner's insurance, you shop for this on your own.
  • Interest rate on a VA loan, VA IRRRL will always have the lowest rates for various reasons. Alas they are not available as a purchase mortgage, so typically you make exactly six payments on the purchase mortgage (the minimum), then do the IRRRL to drop your rate.
Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

One more addition, my strategy is such that 100% of the net profit from other rental properties/flips will go toward the principal of my primary residence. So I am also looking for strategies to take advantage of paying a 30 year loan in 3-4 years (or less maybe)

@Chris Mason That's what I'm talking about! I did not know that there was no PMI on VA or about IRRRL. You already just made me $$$ ;)

@Alexander Ray , that insurance cost seems way too high. I'd assume it wasn't accurate or that she must have crazy claim history. I live in SW OKC and pay about $100/month in insurance on my primary worth about $160k. We have one rental and pay about $60-$70/month for a rental in Moore, OK worth about $70-80k.

@Alexander Ray To answer your question though.

1) Avoid making claims on your insurance policy.
2) Shop around for the best rate (assuming comparable insurance details).
3) Shop regularly. It's common that your rates will increase substantially 10+% year over year. Switching companies is normally pretty easy.

@Thomas Graham , in my experience, my insurance runs within a few dollars of my tax bill so @Alexander Ray 's  experience seems pretty close to me.  We do carry decent coverage and still get roofs replaced... you can buy cheaper policies for sure but by then you're increasing the self-insurance component and I don't choose to do that for a variety of reasons.  One day, I'll make one too many roof claims (it is Oklahoma after all) and the party will be over.  @Chris T. nailed it with buying the cheaper house.  Everything will be less.  Or get a great deal on a more expensive house, tough it out and sell for a profit.  Best wishes to you in this project.

Deborah B. , he states that insurance was over half of her $1200 bill. Something isn't right with that picture. I do agree that taxes/insurance are pretty comparable.

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