A number of factors affect the affordability of affordable homeownership housing. The price must be set to allow a range of households to qualify. Typically, the maximum a household may pay for home purchase is 33 percent of household income for ongoing home purchase costs. This amount must include:
- the monthly mortgage cost, the principal & interest payment on a 30-year-fixed mortgage
- annual property taxes prorated on a monthly basis
- annual property insurance costs, prorated on a monthly basis
- any monthly common charges or Home Owners Association (HOA) fees
To determine the mortgage and other costs, the initial sales price for a new for sale affordable home must be established. That amount will assist in projecting the expected property taxes and property insurance. Also, the expected mortgage interest rate must be projected, since it is often a matter of 12 to 24 months before the potential buyer will be able to apply for a mortgage, while the home is under construction.
To start, estimates of the below factors may be used, but as a proposed development progresses through the approval process, the estimates should be firmed up. Once this information is collected, then the Setting Affordable Sales Price Worksheet in Excel may be used.
|Factor||How the Factor is Used|
|The number of bedrooms in the home||Used to determine household or family size by multiplying 1.5 persons per bedroom by the number of bedrooms in the home|
|The maximum County Area Median Income (AMI) adjusted by family size/ the Target Income at 70 percent AMI||The county maximum is 80 percent AMI, which is adjusted down to 70 percent AMI to assure a larger number of households will qualify – and the worksheet will calculate this amount.|
|The estimated affordable sales price||Which can be adjusted as necessary to assure affordability at or below 70 percent AMI|
|The estimated down-payment by the homebuyer||Five percent is typical for families entering into the homeownership market.|
|The estimated mortgage amount||This amount will be the sum of the sales price less the down-payment – and the worksheet will calculate this amount.|
|The expected interest rate on a 30 year fixed mortgage||The interest rate must be projected forward to the time when the buyer will be securing a mortgage – see below tips for finding current rates and projecting forward.|
|The estimated property taxes on the home||To be provided by the local tax assessor, who should provide an estimate based on a projected affordable sale price, not market value.|
|The estimated property insurance cost on the home||Local insurance agents may be helpful in estimating such costs, or see below tips for finding premiums.|
|Any estimated common charges to be assessed to each homeowner in the development||The developer should prepare a schedule of expected costs to maintain all common elements in a development, and prorate the charges among all units in the development.|
|Any estimated Home Owners Association (HOA) fees to be assessed to each homeowner in the development||The developer should prepare a schedule of the expected fees and services of the HOA, and prorate the charges among all units in the development.|
Tips, Information and Resources:
Interest rate on 30 year fixed interest rate mortgage
When estimating an affordable sale price, the interest rate is an important factor because higher rates increase the mortgage payment. Also, it is important to look at timing for completion and sale of the home. If the sale will not occur for one or two years, it would be important to factor in a possible rate increase based on expected future trends. If rates appear to be stable, then adding .05% to 1% to the current rate for each year between the time of the projection through to expected sale should be sufficient. But if there is more volatility in the market, increasing the rate by a higher factor would help to manage any steep change.
In general, it would not be a good idea to project a rate lower than current rates in the market place at the time a sales price determination is made. If the rates do actually go down by the time of the sale, such change would increase affordability. However, any increase will reduce affordability, making it less likely that the home will be affordable to the families who were intended to live there.
Where to find mortgage interest rates
Good resources to find current rates and trends include the Real Estate section in the local newspaper, and many Web sites. You can also search online for some of the common interest-rate indexes used for mortgages, such as constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). Below are some Web sites that provide a broad range of information about current rates and trends in the market. Because the rate must ensure affordability for the long term only 30 year fixed interest rate mortgage rates should be considered:
- BankRate.com is one site that offers much information, and will provide trending information.
- Financial Forecast Center™ also provides considerable forecasting information and trending.
Information needed to determine the property insurance cost for the home must include detail from the developer regarding the form of ownership; and, in the case where there will be common ownership as in a condominium or homeowners association, what elements will be insured by the condominium entity and what elements are to be insured by the homeowner. In an apartment style complex, the owner often only owns the interior elements of the apartment, and the building exterior and any areas in common are owned and insured by the condominium association. In this case, the owner’s property insurance will be relatively inexpensive – but the common charges assessed monthly by the condominium will include the owner’s share of the insurance cost for the building and common areas.
Once the ownership structure is clear, insurance agents may provide some guidance. Also, some online insurance vendors may have calculators that can be used.
Another good source is the NYS Department of Financial Services, which regulates and monitors the insurance industry. DFS posted results of a cost survey on line, which can provide baseline information.