What Will a Mortgage Cost You?

Posted June 15 2015
by PenFed Team
talking with a mortgage professional

When you’re house hunting, the costs you’re thinking of are probably the sales price of the home or the current interest rates on mortgages—or maybe even the downpayment cost. But there’s a lot of costs that go into a mortgage, and it’s important to consider them before you start house hunting.

Having a realistic idea of what you’ll be paying will help you determine how much you need to have saved up to afford the house of your dreams. Here are the costs (and the things that will affect costs) that you should bear in mind when you’re shopping for a new mortgage:

  1. Purchase Price: Certainly the biggest single cost will be the cost of the home itself. If you’re trying to determine just what you can afford, this is a good place to start because you can measure many of the associated costs as a percentage of the total purchase price.
  2. Down payment: Though different loan types will require different down payments—and some, like VA loans, may not require one at all—you typically want to put down 20% of the purchase price as a down payment. If you don’t, some loans (but, again, not VA loans) may require you to pay for private mortgage insurance (PMI) to ensure your financial institution gets paid. This is definitely an added cost you’ll want to avoid, so be sure you have an adequate amount saved for your down payment.
  3. Interest Rate: The interest rate is the percentage you’ll pay in interest on the amount you’ve borrowed. Though this may seem a small number compared to some of the others you’ll see in your mortgage considerations that number will add up over time. In a fixed rate mortgage the interest rate is fixed for the life of the loan, but in an adjustable rate mortgage has an interest rate that can adjust over the life of the loan—though an adjustable rate mortgage will typically have a lower initial rate, making them appealing.
  4. Points: Often you can pay up-front for points that will reduce your interest rate. Though this increases your initial costs, if you plan on staying in the house for the life of the loan, it may be a good investment that will save you money in the long run.
  5. Loan Term: Many mortgages last for 30 years, but you’ll also find loans for 10, 15, and 20 years. A lower duration means higher monthly payments, but you’ll save a great deal in interest costs over the life of the loan.
  6. Closing Costs: All loans have closing costs, which are a variety of fees and expenses that are involved in closing the loan. On average, typical closing costs can run from 2 to 5% of the total purchase price and include things like title fees, appraisal fees, inspection fees, and the like.

If you’re not sure how much you can afford, we recommend starting with a mortgage calculator, which will let you plug in things like home cost and interest rate, and see how much you’ll pay month to month and over the life of the loan. Not only will this give you a good idea of what your costs will be, it can also help you compare mortgages to decide what type is best for you, and whether it’s worth buying points to lower your interest rate.

Once you’ve run the numbers through a calculator to decide what kind of loan you’re looking for, it’s time to shop around with different lenders to see who’s willing to offer the best deal.

Once you’ve narrowed your options and have selected a lender, it’s time to submit an application. Upon receipt of your application request, the lender will provide you with a good faith estimate (or GFE) that will give you an accounting of all of your costs to give an estimate of the total cost of the loan. Though the final costs may be different, a GFE will give you a ballpark figure that you’re likely to pay for the mortgage.