You’re looking to buy a home. You don’t have anywhere near the amount of cash needed to do so. As such, you’re hoping to take out a mortgage.
The question you have is: What is the total cost of a mortgage in 2020? What sorts of expenses go into a mortgage? There are quite a few, all of which we’ll discuss in this article.
Initial Costs
There are a handful of initial costs that you’ll have to pay when starting your mortgage. They include the following.
Downpayment
Though they don’t all, but many mortgages require a minimum downpayment. The minimum downpayment can range from 3% to 20% of the home’s total purchase price, though, financially speaking, it’s wise to put down a full 20%, regardless of the mortgage requirements.
So, let’s say you’re buying a $200,000 home. Your mortgage requires you to put down at least 5% of that price. That’s $10,000 that you’ll have to pay directly out-of-pocket, all at one time.
Now, you should know that many towns and states offer down payment assistance programs, as do some mortgage lenders. Depending on the circumstances, you might have to pay interest for this assistance. In any case, if you’re short on money, it’s worth pursuing.
Lender Fees
In most cases, when you take out a mortgage, you’re required to pay various fees to the lender. These fees include application fees, origination fees, and the like. Plan to pay at least a few hundred dollars for these fees, and potentially into the thousands.
Additional Fees
There are a variety of other fees you’ll have to pay to miscellaneous institutions. Not only will you have to pay a fee for an appraisal (around $500), but for a credit report (around $50), and maybe even for a flood report (around $20). You might also have to pay a Homeowner’s Association Fee ($200 to $500), depending on whether your home belongs to an HOA.
Note, there are a variety of other fees that you might have to pay as well. It’s dependent on the lender as well as the nature of your home. Budget at least a few hundred dollars for this portion of the expenses.
Monthly Costs
The vast majority of a mortgage’s costs are paid monthly. Some of them end after 15 to 30 years; others last in perpetuity. We’ll review them in detail below.
Principal Costs
The principal costs of your mortgage are the costs that actually build equity in your home. You may pay, say, $1,200 a month for your mortgage, but only around $300 of that will go toward the house itself (that’s the principal).
Note, though, that over time, as more interest gets paid, more and more money will go toward the principal instead. As such, your $300 of principal payment will turn into $400, then $500, and so on and so forth.
Interest Costs
In order to take out a mortgage, you have to pay the lender for the money you’ve been loaned. This money is the interest cost and it is typically between 3% and 6% of the balance remaining on the loan.
Note, in the early days of your mortgage, more of your payment will be going toward interest than it will toward the principal. However, over time, this will reverse, and, by the end of the loan, you’ll be paying almost all principal and no interest.
Make note, the higher your interest rate, the more you’ll have to pay for your mortgage. Over time, the interest could add hundreds of thousands of dollars to your total payments.
It’s also important to be cognizant of fixed-rate mortgages and adjusted-rate mortgages. Fixed-rate mortgages keep the same interest rates for their duration. Adjusted-rate mortgages have moving interest rates; their interest rates could be exceedingly low one month and exceedingly high the next.
Fixed-rate mortgages are considered the safer bet, as they can never charge you more than you’re expecting to pay. Adjusted-rate mortgages, on the other hand, could end up bombarding you with ridiculously high-interest rates in select months, costing you substantially more than you were ever expecting to pay.
If your financial situation is tight, a fixed-rate mortgage is ideal.
Property Taxes
Property taxes are another expense that you’re going to want to keep in mind. These are highly dependent on your area and can cost anywhere from $50 to $1,000 a month and, in some cases, much, much more.
Property taxes are generally based on the appraised value of the home. This value is then taken and multiplied by the municipality’s tax rate.
Note, property taxes fluctuate over time. One year, you might have to pay $15 for every $1,000 of home valuation. The next, you might have to pay $17 for every $1,000 of home valuation. For a $200,000 home, this is a difference of $400.
Property taxes generally increase over time, moving along with inflation as well as the municipality’s need for funding. As such, you’ll want to leave a little wiggle room in this department.
Insurance
You’re also going to have to pay for insurances. Home insurance generally costs between $50 and $100 a month.
But that might not be the only insurance you need to pay. If you put down less than 20% on your down payment, you’ll likely have to pay private mortgage insurance as well, at least until you have 20% equity in the home. This usually runs between 0.5% and 1% of the home’s remaining value, and will typically add $100 to $200 to your total monthly payment.
The Total Cost of Mortgage is Higher Than You Think
As you can see, there are a lot of expenses that go into a mortgage. The total cost of a mortgage is likely much higher than you think. So, before pursuing a mortgage, make sure that you’re able to pay the many expenses associated with it.
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