How to Prepare for the Cost of Getting a Mortgage
When looking to purchase a home, be sure to understand the fees and costs involved. By taking some time to prepare ahead of time, you can get a better loan deal and avoid costly errors that could end up costing you money in the long run.
Closing Costs
Purchasing a home is an enormous financial commitment, and closing costs can come as an unexpected expense. Fortunately, there are ways to reduce these fees and get the best deal on your new house.
First-time homebuyers may qualify for assistance with down payment and closing cost expenses through programs like HUD. Private banks may provide incentives specific to certain loan types as well. You can also use an online affordability calculator if you’re uncertain how much you can spend on a house purchase.
When purchasing a home, you will have to pay numerous fees and taxes – collectively known as “closing costs.” On average, buyers typically shell out between 2%-5% of the total sale price in closing costs, including fees and taxes; however, this amount may differ from state to state.
Closing costs are usually handled jointly between the buyer and seller. However, some buyers opt to negotiate with the seller in order to cover some of their closing expenses such as transfer tax, title insurance, and attorney’s fees.
You can get an accurate estimate of your closing costs by reviewing the lender’s Good Faith Estimate, which is provided at the start of the mortgage application process. While these figures may not be 100% precise like Zillow’s mortgage calculator, they give you a ballpark figure for what to expect.
Closing costs such as appraisal, survey and inspection fees are common items you’ll have to pay before closing on your home. An appraisal determines the value of your property while surveys and inspections guarantee that there are no pests or other issues with the house you’re buying.
The inspector will inspect items like the roof, HVAC system and major appliances to guarantee they’re in working order. They also let you know if there are any major or minor issues that need fixing before closing.
During the closing process, you’ll need to pay your lender’s fees and administration costs as well. These typically aren’t included in your overall mortgage amount so it’s essential that you discuss them with them before making an offer on a home. Depending on which lender you select, these costs could account for more than 50% of total closing expenses.
Private Mortgage Insurance (PMI)
If you’re a first-time homeowner or veteran looking to purchase a home, private mortgage insurance (PMI) may have come up in your search. This extra fee is added onto your mortgage if you don’t make enough money for a 20% down payment.
Supplemental insurance provides lenders with protection against defaulting borrowers, such as those in the mortgage industry or government-backed ones like FHA mortgages. While it’s required for many conventional loans and some government-backed ones like FHA mortgages, not everyone is affected by it.
PMI premiums are determined by several factors, including your loan-to-value ratio — the percentage of the home you owe compared to its value — as well as other financial circumstances. With higher credit scores, homeowners pay less while those with lower scores must pay more.
What’s more, you can request that your lender cancels your mortgage insurance when you achieve 20% equity in your home through either paying down the principal or increasing its value through market improvements. However, typically speaking you must continue paying for this coverage for two years until your request is granted.
When applying to cancel your mortgage insurance, you’ll need evidence that you have made regular payments and the value of your home has increased. This is usually accomplished through an appraisal, so make sure it’s complete before applying.
You have three options for paying your private mortgage insurance: upfront, monthly or a combination of both. Your mortgage officer can assist you in deciding which option best fits your needs.
If you’re a first-time homebuyer, the option of paying for private mortgage insurance may seem appealing, but be sure to factor in how much it will cost over time. While it can be an additional burden, having this tool on your side helps get into your dream home sooner rather than later.
Before signing a contract, it’s wise to consult a lender about how much your mortgage will cost and the total cost of buying a home. Once you know how much you can afford, you can begin planning for other expenses.
Property Taxes
Property taxes are fees levied by local governments to support services like schools, roads and fire departments. While it’s easy to forget about them when looking for a house, they can have an important role in determining how much you can afford when buying a property.
When applying for a mortgage, your lender will ask how much you plan to spend on property taxes annually. Knowing this amount ahead of time helps ensure you budget appropriately and have enough money to pay them when due.
Your tax bill is calculated by multiplying your property’s assessed value by a local government’s tax rate. This figure will be determined by the tax assessor in your area, who also takes into account sales figures for similar homes in the area and current market values when making their determination.
Many communities reassess property values annually, so be on the lookout for a new bill from your local government. These reassessments could potentially affect your tax bill which usually arrives in late fall or early winter each year.
You can check online to see if your property’s assessed value has changed. If it has, expect your tax bill to increase accordingly.
Most states provide tax deductions and exemptions to help offset property taxes; however, you will need to check with your local government for more specific information.
If you plan to stay in your home for some time, refinancing your mortgage could help lower property taxes and reduce your total monthly payment by combining property taxes with mortgage principal and interest costs.
Many homeowners discover they can reduce their property tax burden by refinancing to a lower interest rate. This will lower your monthly payment and give you more money in your pocket for other expenses.
Property taxes are one of the more significant expenses that come with owning a home. Since they can amount to quite a substantial sum of money, it’s essential that you comprehend their workings and how much you’ll owe.
Homeowners Insurance
Homeowner’s insurance is an integral component of the financial process of buying a home. Not only is it required by most lenders, but it also safeguards you and your lender in case your house suffers damage or loss.
It’s wise to take steps to reduce your homeowners insurance premium. This includes shopping around and getting quotes from various insurers.
The cost of your homeowners policy varies by state, the type of coverage purchased and individual circumstances. However, certain elements remain consistent across America.
Your credit history and home’s cost will likely be two key elements used by your insurer when calculating rates.
Comparing home insurance rates from different companies will enable you to find the most cost-effective options available to suit your individual needs. Contacting at least three firms for estimates will give you a good indication of what’s out there that meets those criteria.
One way to reduce costs is by selecting a lower deductible on your policy. A deductible is the amount paid before insurance starts covering claims. You may also opt to have separate deductibles for specific claims such as damage caused by wind, hail or hurricanes.
Your deductible can help lower your monthly mortgage payment by limiting the amount of out-of-pocket money necessary to repair or replace your home after a disaster.
Other ways to reduce your home insurance premium include keeping the structure in good repair and selecting an appropriate policy. This could involve purchasing replacement cost or actual cash value insurance, which will pay to rebuild your house if it’s destroyed.
If your area is more susceptible to storms and hurricanes, flood insurance may be required by many mortgage lenders and/or your local government.
Finally, you can add riders to your homeowners policy in order to insure items that are too valuable to be covered under the standard policy. Typically, riders provide additional coverage for valuable antiques or artwork.