Mortgages are one of the biggest purchases you’ll ever make. They’re an essential component in owning a home, yet their costs can vary considerably.
Fortunately, lenders are required by law to give you a loan estimate within three days of your mortgage application. These documents list every fee associated with your offer and enable comparison shopping for other loan products.
First-Time Homebuyers:
For first-time homeowners, taking advantage of low or no interest loan programs offered by your state, county or city can save you money. In addition, some banks and credit unions provide down payment assistance to new buyers as well.
Closing Costs:
Calculating the cost of closing a mortgage can be complicated due to its dependence on the lender and services they offer. Nonetheless, it’s essential to remember that much of the total cost associated with getting a mortgage consists of closing fees.
According to the National Association of Realtors, homeowners typically pay between 2% and 5% of their home’s purchase price for these costs. That works out to anywhere from $5,000 to $12,500 on a $250k mortgage.
Your lender will create an escrow account to cover the costs of property taxes and insurance. At closing, you contribute funds to this escrow account – usually equivalent to two months worth of taxes and premiums. Furthermore, you have the option to prepay interest on your loan in order to reduce its overall cost.
Mortgage Insurance:
If your down payment for a home is less than 20%, your lender may require private mortgage insurance (PMI). PMI is an additional expense that can add up quickly; it’s an additional monthly payment in addition to your regular mortgage payment that protects the lender in case of default.
Mortgage insurance premiums vary by lender and loan type, but are usually between 1.75% to 2.25% of the amount borrowed. They’re required on government-backed loans such as FHA or VA loans with a down payment of less than 20%.
Rate Lock:
When applying for a mortgage, your lender will provide you with a rate lock contract that guarantees an interest rate for a specified period. This can be invaluable as it prevents you from paying higher rates in the future.
Loan Origination Fees:
Many lenders charge upfront loan origination fees to cover the costs of processing paperwork for your mortgage. Some charge a flat fee, while others provide an up-front discount.
Other fees may include lender’s title insurance, which protects them in case someone claims ownership of your house. Your lender may also charge for a flood insurance certificate or to update your property records.
When purchasing a home, it is essential to have realistic expectations about the costs involved. By understanding what an average home costs and what you can afford, you will be better equipped to negotiate with your lender.
