There is the cost of the home then there are “other” cost that make up how much you will need to borrow, which can determine the type of mortgage that fits your needs and your budget.
Mortgages can be paid in two ways: upfront and over time. When choosing a mortgage, it’s important to look at both types of costs. A mortgage with a lower monthly payment may have higher upfront costs, or a mortgage with low upfront costs may have a higher monthly payment.
Monthly costs. Your monthly payment will typically contain four elements:
- Principal. This is the money you borrowed and have to pay back. This is part of the cost of buying your home, but not a cost of borrowing money.
- Interest. This is the primary cost of borrowing money, but not the only one.
- Mortgage insurance. This is an additional cost of borrowing money, typically required for borrowers who make a down payment of less than 20%.
- Property taxes and homeowners insurance. These are costs of home ownership, not of borrowing money. Typically these costs are bundled with your monthly payment and managed by the lender through an escrow account.
In addition, you may pay for condominium or homeowner’s association dues. These costs are usually paid separately from your monthly payment.
Upfront costs. In addition to your down payment, you have to pay for several different kinds of costs at closing that help protect against your largest investment.
Your lender is required to outline your closing costs in the Loan Estimate and this Closing Disclosure you receive before the big settlement day. Take the time to review them closely and ask questions about things you don’t understand.
- Origination and lender charges. These costs are charged by the lender for originating, or making you the loan. They are part of the price of borrowing money. Different lenders may choose to itemize these costs to varying degrees it’s the overall total that matters. Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc.
- Points. Points are a charge you pay upfront to the lender. Points are part of the price of borrowing money and are calculated as a percentage of the loan amount. You can choose whether or not to pay points.
- Third-party closing costs. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance.
- Taxes and government fees. These fees are charged by your local government. They are charged in connection with the real estate transaction, but are usually not a cost of borrowing money.
- Prepaid expenses and deposits. These expenses may be associated with your loan or with home ownership. Typically, you need to pay the interest on your loan between the time you close and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.
The more you know, the more you can make an educated decision about the mortgage that is right for you. The MTC Federal experts can help with additional information and resources. Use our mortgage calculator to determine how much you can afford.