Your mortgage will have other costs on top of the principal and interest. You’ll have additional expenses to close the mortgage and maintain your loan. These expenses include homeowners insurance, property taxes, closing costs and local fees.
Homeowners insurance. Lenders usually require you to buy homeowners insurance as part of your mortgage. This insurance would pay to repair damages after problems like fires, lightning strikes and vandalism. Lenders use your home as collateral in case you default, so they require insurance to protect their investment.
Property taxes. Local governments charge property taxes to fund their operations. Property taxes can be a substantial part of your monthly payment and, in some areas, may be more than what you’re paying for the loan. Be sure to research local property tax rates before buying a home.
Association fees. If you buy a property in a planned development, there may be a homeowners association that maintains the neighborhood. You will pay the association a fee to cover your share of the maintenance.
Private mortgage insurance. If your down payment is less than 20 percent of the total purchase, the lender will likely require you to buy private mortgage insurance. This insurance pays the lender if you stop making payments and default on your mortgage. You’ll need to pay private mortgage insurance premiums as part of your mortgage payment.
Once you’ve paid off 20 percent of the property, you can request that the lender end the PMI. The lender is legally required to remove the insurance requirement once you’ve paid off 22 percent of the property. Make sure to ask once you’ve paid off 20 percent so you don’t pay for this insurance any longer than you have to.
FHA, VA or USDA fees. If you take out a mortgage through the FHA, VA or USDA, the government agencies will charge their own fees to support the program. Even with these fees, VA and USDA loans are typically less expensive than conventional mortgages. However, the extra FHA fees can make these loans more expensive than conventional mortgages.
Additional Costs Can Add Up
Mortgage insurance can cost between 0.3 to 1.5 percent of the original loan amount per year. Homeowners insurance costs on average about $1,000 or more per year. Median property tax rates range from 0.18 to 1.89 percent, depending on the state, according to Tax-Rates.org.
For example, if you take out a $200,000 mortgage with a 30-year term and 3.5 percent fixed rate, your mortgage payment will be $898 per month and $10,776 per year. Additionally, if you pay 1 percent for property tax, 0.75 percent for mortgage insurance and $400 a year for homeowners insurance, you will pay an additional $3,900 annually, increasing your costs by 36 percent each year. Make sure you budget for these other expenses.
Mortgage Closing Fees
Property Evaluation Fees
Appraisal fee. Your lender will hire an appraiser to estimate the fair market value of the property as it evaluates your mortgage application. It could charge you for the expense. The average appraisal costs about $300 to $700, according to the Federal Reserve.
Survey fee. You may need to pay for a survey to transfer the title. The survey maps out the exact borders of your property to show what you’re buying. This costs roughly $200 to $800.
Home inspection. While lenders typically do not require it, a home inspection is recommended. The inspector can identify problems with the property so you can make an informed purchase. A home inspection costs about $250 to $400.
Flood determination assessment. If you’re in an area where flooding could be an issue, the lender could ask you to make an assessment to determine whether your property is in a flood zone.
Application fee. Some lenders will ask that you pay an upfront application fee before they will review your mortgage application. They may include the appraisal as part of this fee so that can get started right away. The typical application fee costs about $100.
Credit report fee. It costs money to access your credit report, so lenders may ask you to pay the fee. Others will include it as part of their application fee.
Origination fee. Once your mortgage has been approved, the lender will charge an origination fee to set up the loan. This is a percentage of your entire loan and usually ranges from zero to 1.5 percent of your mortgage amount.
Attorney fees. Some states require you to have an attorney present when you close your mortgage. Even if you aren’t required to hire one, attorneys can help you review the documents to make sure the deal is fair. This fee depends on the attorney’s rates.
Mortgage broker fee. If you worked with a mortgage broker to find your loan, her or she will charge a fee. The fee is a percentage of the total loan, typically 1 to 2 percent. Either you, the lender or the seller will pay the fee, depending on what you negotiate.
Prepaid interest. After you close your loan, there will likely be a gap of several days or weeks before your first mortgage payment is due. The lender will ask you to prepay the mortgage interest for that period of time so you’re up to date on interest by the time you make your first loan payment.
Lender’s title insurance. Lender’s title insurance protects the lender in case of legal issues with ownership of the property. For example, if someone files a lawsuit alleging the previous owner wasn’t legally allowed to sell the property, title insurance covers the lender’s legal expenses. Lenders usually require you to purchase this insurance on their behalf. The average lender-only policy costs about $1,000.
Owner’s title insurance. If you want to protect yourself against legal issues from transferring the title, you can buy owner’s title insurance. It would cover the legal costs in case of future issues with the title.
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