When you purchase your next house – which 6.5 million households should do this year – you'll most likely need a mortgage on the property to buy it. With an average price of $152,000, the Average American just doesn't have that kind of money laying around.

So here's what you'll need: a down payment of at least 3 - 5 percent, enough money for closing costs (generally another 5 percent); and PITI (Principal, Interest, Taxes and Insurance) reserves, meaning enough cash in the bank to pay for your monthly payment for the next three months. In real dollars on a house priced at $150,000, that means $4,500 to $7,500 down payment, $7,500 for closing costs, and roughly $3,300 for three monthly payments of $1,100 each. But that depends on the cost of your taxes and insurance.

The monthly mortgage is made up of principal, interest, taxes and insurance. The first two elements of this formula are well defined. Plug in the loan amount, down payment, interest rate and the number of years for pay back, and you will find that the above loan with a 5 percent down payment is $948.06 for principal and interest payments to the lender. But then all things being equal, that's where the equality stops. The “T” and final “I” of this formula differ property to property. The T is for taxes the I is for insurance – and it may be more than one insurance payment. If your down payment is less than 20 percent, you'll have to pay private mortgage insurance

What does PMI cost? This insurance premium, which protects the lender from a defaulting borrower, varies, depending on the down payment. As an example, if a purchaser buys a $150,000 home with a $15,000 down payment, the PMI on that house will be .0052 percent on the loan amount, according to Mortgage Guaranty Insurance Corporation (MGIC) in Milwaukee, Wis., the largest PMI provider in the country. With only a 10 percent down payment, the house will require PMI of $702 per year – $58.50 per month.

Now, your hazard insurance is for the value of the property to replace it if it is destroyed by some sort of disaster. Again, this is going to differ according to the value of the house and your underwriter, but for a $150,000 house, let's assume a payment of $900 per year – $75 per month.

Finally, there are the taxes and this is where you'll have to do some local homework. In the metropolitan Washington, D.C. area for instance, we have dozens of tax rates in the surrounding jurisdictions. In my county, Fairfax, it's $1.21 per $100 assessed value. Keep in mind what you pay for a house may not reflect the assessed value. If a $150,000 property is assessed at $135,000 the tax bill would be: $135,000 /$100 = 1,350. Multiply 1,350 by $1.21 = $1,633.50 per year or $136.13 per month.

So for a $150,000 house with a 10 percent down payment (mortgage amount of $135,000), on a 30-year loan at 7 percent we have a $948.06 principal and interest payment, plus a $58.50 PMI payment, plus a $75 hazard insurance payment, and finally a $136.13 tax payment per month – combined to equal $1,217.69 per month.

Fortunately, some of these can drop off after a while. The private mortgage insurance, by law, can be dropped after your equity in your home reaches 20 percent. Obviously, if you stay in the house long enough, you'll drop the principal and interest. The hazard insurance is generally required by the mortgage company to protect its investment, but you may want to maintain that policy even without a mortgage. And the taxes? Well, you know what they say: two things in life are certain – death and ....well, you know.

RESOURCES:

To calculate your own payments you'll need the taxes and insurance payments in hand to add to the calculation, but here are some good real estate calculators online:

Published: August 9, 2002

Use of this article without permission is a violation of federal copyright laws.