Understanding Mortgage Costs
Buying a home is a huge financial commitment and you want to make sure you understand what costs are involved before you start the home buying process. Knowing exactly what costs are involved when it comes to buying a home can be confusing, especially if you are a first time buyer. Read on for some basic information to get you started or check out our mortgage calculators to see how much you can afford.
MORTGAGES
While some people may be able to purchase a home with all cash, most people will need to take out a loan. The first step is to see how much money you are qualified to borrow. According to Freddie Mac, in order to qualify in today’s market, you’ll need:
- A stable income
- A good credit history
- A down payment – generally between 5-20% of the purchase price of conventional, conforming mortgages, depending on the type of loan you get.
Documentation – responsible lenders will want documents to verify your income: w-2 forms, tax returns, employment, credit history and assets – such as bank statements to verify your savings.
An impartial 3rd party appraisal – Your lender will need to verify the value of the home you want to purchase.
Once you are qualified, you’ll have some decisions to make: mortgage terms, interest rates, and what type of mortgage is best for you. Don’t worry, I can get you set up with a lender who will guide you through this process.
MORTGAGE TERMS
The mortgage term is the amount of time the lender will allow you to borrow the money for your home. For fixed-rate mortgages this is generally 15-30 years. But for Balloon or reset mortgages it’s much shorter, typically 5-10 years.
MORTGAGE TYPES
Fixed Rate Mortgage – The most common type of mortgage available. Because your interest rate never changes, the monthly principal and interest payments remain the same for the entire term of the loan – 15 year, 20 year, 30 year – make your monthly housing costs more predictable and stable.
Adjustable Rate Mortgage – Also known as ARMs, these mortgages may start with a lower interest rate, making your initial monthly payments lower. However, unlike a fixed rate mortgage, your interest rate will adjust periodically to reflect the changing market interest rates. While this can be beneficial if interest rates drop, it can also cause your monthly payments to increase if the interest rates go up.
Balloon/Reset Mortgage – At the end of the balloon/reset mortgage (generally 5 to 7 years), you will be expected to pay the entire remaining balance in a lump sum or you may be able to refinance into another mortgage. Be sure you understand all the terms and conditions associated with the balloon mortgage before selecting it.
ANATOMY OF A MORTGAGE PAYMENT
Principal – This is the amount of money you borrowed to buy your house.
Interest – The interest is how much you pay to borrow the money from the bank.
Taxes – Typically, you will pay your own property taxes annually but if you choose to open an impound account your lender will collect with your mortgage payment 1/12th of the estimated annual real estate taxes on the home you purchase. They will put this 1/12th in an escrow account each time you make a payment so they can pay your taxes when they are due.
Homeowner’s Insurance – Your first annual homeowners insurance premium will be paid at close of escrow. After that, your insurance provider will bill you annually. Mortgage Insurance – If your down payment is less than 20%, your lender will probably require private or government mortgage insurance. They’ll place 1/12th of the annual premium into an escrow account and use it to pay the premium when it is due.
Mortgage Insurance – If your down payment is less than 20%, your lender will probably require private or government mortgage insurance. They’ll place 1/12th of the annual premium into an escrow account and used to pay the premium when it is due.