How to Calculate the True Cost of a Mortgage

 

The true cost of a mortgage is more complicated than just the principal or even the principal plus interest.  To determine how much you may spend over the lifetime of a mortgage, consider fees, insurance, taxes, and the ongoing expenses that come with homeownership. Some factors, like down payments and mortgage points (also referred to as discount points) , can affect the cost of a home loan over time by reducing the interest. Some lenders offer tools like a mortgage points calculator or monthly payment estimator that could help you calculate your cost. However, taking the time to understand all the factors that go into the cost of a mortgage can help you make informed decisions while shopping for a home.

Upfront Costs

The cost of buying a home goes beyond monthly payments and interest rates. You should be prepared to cover extensive upfront expenses out of pocket. The most notable expense is the down payment, typically a percentage of a home’s purchase price. But you should also budget for fees from your lender, appraiser, and any other entities that take part in the mortgage.

What to Know About Down Payments

If you’ve been planning to purchase a home, you’ve likely spent some time saving for the down payment. Your required down payment may range from 3% to 20% of your home’s value, depending on your lender and loan type. The more you put down, the less money you’ll have to borrow. A smaller mortgage may mean more affordable monthly payments throughout the loan’s lifetime and less interest.

Consider Mortgage Points

You can usually purchase each mortgage point for 1% of your total loan amount. Each point usually reduces your interest rate by .25%. So, buying four mortgage points could bring your interest from 4% to 3%. Like your down payment, mortgage points reduce the long-term cost of your home. However, mortgage points aren’t part of your down payment. They go toward interest, not equity.

Exploring Closing Costs

Closing costs include all fees and other expenses you pay when finalizing your mortgage. Typically, your lender provides a Closing Disclosure document listing all your closing costs. Some of the fees you might encounter include the following:

• Loan origination fees – the cost of underwriting the loan
• Application fees – a one-time processing expense
• Title insurance costs – insurance that protects your lender if someone else claims to have a right to the home

• Appraisal fees – price of professional assessment of the property’s fair market value
• Inspection costs – price of professional assessment of the property’s safety (not required by lender)
• Property taxes – the first month’s property tax. Sellers and buyers usually split this expense.

You can negotiate with your lender to bring down your closing costs. If you’ve been pre-approved for mortgages from several lenders, you could leverage those offers to secure better rates or smaller fees. You may also work directly with the seller and ask them to cover more of the closing expenses. This may be an effective tactic if the seller is looking to close within a short timeframe or hasn’t received many offers.

Calculating Total Monthly Payments

At their most basic level, three factors determine your monthly mortgage payments: your loan amount, interest rate, and term. Typically, if you have a longer loan term, you’ll have smaller monthly payments but pay more in interest over the loan’s lifetime. A shorter term, on the other hand, means paying more each month but accruing less overall interest.

Fixed vs. Variable Interest Rates

If your mortgage has a fixed interest rate, your interest won’t change throughout your term. That means you can expect your monthly payments to stay level (aside from taxes and HOA fees which could vary). On the other hand, a variable interest rate may change with fluctuations in the market. If you have a variable-rate mortgage, your monthly payment could change (typically within parameters set by your lender).

Taxes, Insurance, and Fees

Municipalities typically calculate property taxes for the year, by dividing the yearly amount by 12 you can determine your monthly breakdown of that rate. Lenders may also calculate this rate for escrow purposes if applicable. As you begin house-hunting, be sure to research each location’s property taxes, as they can vary drastically.

Your monthly expenses may also include insurance premiums. Most lenders require homeowners insurance, which protects you in case of an emergency that damages or destroys your home. Some lenders also require private mortgage insurance on conventional loans. This insurance protects lenders in case the homebuyer ever stops making payments. Typically, you can avoid private mortgage insurance on conventional loans by providing a down payment of over 20%.

Finally, if you’re part of a homeowners association (HOA), you typically pay membership fees. Each HOA determines cost differently. Your fee likely depends on the benefits your HOA provides.

Evaluating Affordability

Buying a home is a major financial decision. Consider market trends, including interest rates, in the current housing market to determine whether now is the right time to buy. If rates are high or supply is low, you may want to proceed with caution to avoid overspending.

No matter what the market conditions are, you should assess your own finances before buying a home. You could start by checking your credit reports and score, as your credit affects your mortgage eligibility and rates. Consider paying down debts to improve your credit, if necessary.

Assess your income, savings, and assets to determine whether you can afford the upfront costs, monthly payments, and maintenance expenses without draining your income. Consider not only your current salary but also your job stability and trajectory. If the future is uncertain, it may not be the best time to buy a home.

Finally, consider your goals and lifestyle. If you value being able to pick up and move to a new city every few years, it may not be the right time to buy.  But if you’re looking for an investment property, to establish roots in a community, or to begin building a lasting family home, it might be the right time to take the leap.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.