All the costs associated with buying or refinancing your home can be confusing. There are upfront costs as well as ongoing costs. Let’s explore each!
1. Down Payment (Purchase Only)
While the Down Payment is not a cost, it’s still money you have to provide towards buying your home. It’s actually a deposit that will be credited towards your purchase price when you close on your home purchase. Although you may have heard that a 20% down payment on a home is the “standard” for lenders, that is not the case. There are ways to buy a home with as little as 3% down. Your down payment will decrease your loan amount, thus decreasing your monthly payment and also the amount of interest paid over the life of your loan. A higher down payment could mean a lower interest rate as it provides lenders with a degree of security. Most importantly, with a 20% down payment it allows you to avoid mortgage insurance.
Tip: Our certified Loan Pros will assist you by recommending a suitable down payment based on your current financial situation and current interest rates.
2. Closing Costs
Closing costs are unavoidable. They are simply part of obtaining a mortgage loan. Closing Costs are made up of Loan Costs and Other Costs.
Loan Costs are associated with the loan itself. They consist of title searches, title insurance for your lender, appraisal, attorney or closing fees, underwriting fees, and credit reports. ‘Points’ are actually prepaid interest in order to lower your interest rate.
Other Costs are items not associated with the loan. These include prepaying property taxes, recording fees and establishing an escrow account. An escrow account is a cash bank account you pay into each month to accumulate the money that will be needed to pay your annual property taxes and Homeowners insurance premium.
Tip: When applying for a mortgage, closing costs will be disclosed on your initial loan estimate – giving you an idea of what to expect at closing.
When you buy or refinance a home, lenders require you to pay interest up-front for the remainder of that given month. Because mortgages are paid in arrears, if your loan funds on the 16th of April, you will need to pay 14 days of prepaid interest at closing (for interest from April 17-30). That said, your first mortgage payment wouldn’t be due until June 1st.
Monthly payments cover the interest from the previous month.
Congratulations! You have officially made all the up-front costs, successfully closed, and the home is officially yours!
So, now what?
Your mortgage includes multiple on-going costs during the life of your loan – it is important to fully understand all costs associated post-closing in order to make your full payment on-time to avoid penalties. In most cases, all of these costs will be bundled into your monthly mortgage payment.
1. Principal & Interest
Principal is the amount you pay each month to build ownership/equity in your home, while interest is what the lender charges for letting you “borrow” the money. You can always pay more than the minimum principal payment to reduce your balance and the amount of interest paid over time. This is called ‘paying down principal’. You will not be charged interest on additional principal paid down each month.
2. Property Taxes
Property taxes vary by county, and are calculated as a percentage of your home’s value. Lender’s often include property taxes into your monthly payment total (escrow account).
3. Homeowners/Hazard Insurance
Lenders require Homeowners Insurance to ensure the home is protected. Similar to taxes, lenders typically include Homeowners Insurance into your monthly payment total (escrow account).
4. Mortgage Insurance (If Applicable)
If you are unable to come up with 20% of the purchase price for your down payment, mortgage insurance is unavoidable (except for VA loans – no mortgage insurance required) For conventional loans, you will owe Mortgage Insurance (MI -or- PMI) until you build 20% equity ownership in your home. Expect this to be approximately 2% of the loan amount annually. Unfortunately, FHA loans have two types of Mortgage Insurance – an upfront mortgage insurance premium and ongoing Mortgage Insurance for the life of the loan.
5. HOA Fees (If Applicable)
If you own a home in a planned development that has a Homeowners Association, you’ll probably have a monthly assessment on top of your mortgage payment. These additional fees will be collected and distributed back into your neighborhood for services such as landscaping, maintenance, upkeep, structural updates, etc. Unlike the others, these fees are typically paid separately from your mortgage – directly to the Association.
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