Regardless of your interest rate, the accrued interest on your mortgage is the largest portion of your home financing cost.
You probably realize that borrowing money costs money, but if you are a first-time homebuyers, you may be surprised at the amount of money you need to close on a house. Typical home financing costs can vary by lender, but the basic components of those costs are generally the same.
Closing costs
At the closing, you must be prepared to hand over a check to cover the basic closing costs. These costs are intended to cover the mortgage lender's expenses associated with the loan, such as credit reports, appraisals, home inspections and document processing fees or loan origination fees. Closing costs are typically 2 to 3 percent of the total amount of the mortgage.
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Discount points
Home mortgage lenders may also require you pay home loan discount points, which is essentially prepaid interest on the loan. Paying points at the closing reduces your overall interest rate on the loan. If property taxes and homeowner's insurance will be included in the mortgage payment, many lenders will require you create an escrow account to cover tax payments for about nine months and insurance premiums for two months. Lenders may also require the first year of the homeowner's insurance to be paid in full at the closing.
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Accrued interest
Although these upfront costs may be startling, the interest on the principal of your mortgage is the biggest home financing cost. No matter how low your mortgage interest rate is when you borrow or what type of loan you choose, the interest accrued over the life of the loan may seem staggering.
Lenders calculate the interest due each month based on the remaining principal balance of the loan. While the payment does not change with a fixed-rate mortgage, the amounts that are applied toward principal and interest will change over time. If all payments are made on time on a 30-year $150,000 mortgage at a fixed rate of 5 percent, the total home financing costs for interest alone is roughly $140,000.
Private mortgage insurance
Additionally, you may be required to pay private mortgage insurance (PMI). The premium for this insurance, which is added into the monthly mortgage payment, is designed to protect the mortgage lender in the case of a default on the loan. PMI costs vary, depending on the amount of your loan and the size of your down payment, but they are usually equivalent to between 0.3 and 1.15 percent per year of the mortgage principal.
If you borrow $150,000 on a $160,000 home, you will probably have to pay PMI. If the PMI premium is 0.49 percent, you pay an annual premium of $735 per year, or $61.25 per month. Once enough of the mortgage principal is paid to bring it to below 80 percent of the value of the home, you can request that the lender waive the PMI requirement.
Home financing costs are hefty, but owning a home builds equity and net worth. If you understand the money needed to get a home loan and pay for your home, you can make a sound investment. To compare quotes from national lenders, go to Reply! today.
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