Figuring mortgage cost on a home can be confusing. Even if this isn’t your first experience with buying a home and calculating your costs, the process leaves many stymied. Knowing all the components will help you understand what’s involved and help you shop for a new home with confidence.
Certainly, a home loan can often involve many fees. We’ve grouped them as follows to help you consider all the charges and fees that determine your mortgage cost.
Upfront Mortgage Cost
Loan origination fees are charged by the lender for making the loan. Common names for lender fees are application fees, underwriting fees, origination fees, administrative fees, etc. These fees are the cost of borrowing money.
Points are fees that are also known as discount points. You pay points directly to the lender at closing in exchange for a reduced interest rate.
Taxes and prepaids include property taxes and recording fees, homeowner’s insurance, property tax, and possibly interest. This amount is subject to change because different municipalities and insurance companies require different amounts up front. Depending on your closing date, some of these fees can vary widely depending on the day of the month that you close.
Other closing costs include fees paid for appraisals, title insurance, and your down payment, if required. You can expect to pay 2%-5% of the homes purchase price in total closing costs.
Monthly Mortgage Cost
Principle. This is the total amount of money that you borrowed from the bank to buy your home. Your loan term is the number of months/years you agreed to pay back the loan and you calculate your monthly payment by dividing the total borrowed amount by the months in the term.
Interest. This is the amount the bank charges you to service your loan. You pay interest with every payment, but your first few years are mostly interest and it declines yearly until you are paying mostly principal in the later years of the mortgage.
Mortgage Insurance. This is a fee required when your down payment is less than 20% of the total amount that you borrow.
Property Taxes and Homeowners Insurance. Your lender collects these fees in your monthly payment and places them in an escrow account and then pays the annual premiums and taxes directly to the appropriate creditors when the fees are due.
Potential Changes to Monthly Mortgage Cost
Fixed-term mortgages will require the same monthly mortgage payment for the life of the loan, meaning the total principal plus interest payment will remain the same. However, insurance rates and tax rates can change, and that may change the total amount of your monthly mortgage payment. Likewise, if you are paying mortgage insurance, you can stop paying that charge after your loan-to-value is less than 80%, or when you own 20% or more of your home.
Calculating Your Monthly Mortgage Payment
There are many websites, like this one, that allow you to predict your monthly mortgage payment. It’s certainly a handy tool to get you in the ballpark but remember that the amount of your down payment and your interest rate can dramatically affect your monthly payment. Keep in mind that the calculator won’t be able to tell you the upfront mortgage cost, either, so keep that in mind when you are planning your finances.
Play around with the numbers to see what you can afford. Happy house hunting!