How Much Does a Mortgage Cost?

As you begin on your journey to homeownership, the costs of buying a home that come to mind are probably the sales price of the home or the current interest rates on mortgages. You may even be thinking ahead to potential down payment amounts. But there is a lot more involved when it comes to the costs and fees that go into a mortgage. And every one of them is important to consider before you start house hunting.

Having a realistic idea of what you may pay will help you better determine how much you need to save to afford the house of your dreams.

What is the cost of a mortgage loan?

Aside from the closing costs, which are typically paid upfront on closing day, the actual cost of your mortgage will be paid over the life of the loan through your monthly payments.

It is important to keep in mind that there are various factors that influence the cost of your mortgage, including:

• The home loan you choose

• Where the home you are buying is located

• How much the property costs

• What your mortgage rate is

• The length of the loan term

• How large of a down payment you are able to provide

Let us break these factors down even further, so you can better understand how they can affect the cost of your mortgage loan.

6 costs to consider before applying for a mortgage

Here are the costs (and items that will affect costs) that you should keep in mind when you are shopping for a new mortgage:

1. Purchase Price: The largest amount of money will be the cost of the home itself. If you are trying to determine what you can afford, this is a good place to start as you can measure many of the associated costs as a percentage of the total purchase price.

2. Down payment: Different loan types will require different down payments. For example, Veterans Affairs (VA) loans may not require one at all. However, you typically want to put down 20% of the purchase price as a down payment. If you do not, some loans (excluding VA loans) may require you to pay for private mortgage insurance (PMI) to ensure your financial institution gets paid.

3. Interest Rate: The interest rate is the percentage you will pay in interest on the amount you have borrowed. Though this may appear to be a small number compared to some of the others you will 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. However, in an adjustable rate mortgage it will have an interest rate that can fluctuate over the life of the loan—though these types of mortgages will typically have a lower initial rate that may make them appealing.

4. Points: Often you can pay upfront for points that will reduce your interest rate. Though this increases your initial costs, if you plan on staying in the house for a long time, it may be a good investment that can save you money in the long run.

5. Loan Term: Many mortgages last for 30 years, but you may also find loans for 10, 15, and 20 years. A lower duration means higher monthly payments, but you will end up saving in interest costs over the life of the loan because it is likely to be paid off faster.

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, closing costs can run from 2% to 5% of the total purchase price and include items like title fees, appraisal fees, inspection fees, and more.

How to calculate potential mortgage costs and monthly payments?

If you are 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. These online tools will allow you to estimate how much you may pay month to month and over the life of the loan. Not only will this give you a good idea of what your costs could be, it can also help you compare mortgages to decide what type is best for you, and whether it is worth buying points to lower your interest rate.

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

Choosing the right mortgage lender

The great news is that choosing the right mortgage lender can help you save more on your mortgage, and the decision is completely up to you. As you research and shop around for a lender, you can reach out to those at the top of your list to get more information on their services, interest rates, and borrower requirements. Be sure to also consider credit unions as a possible lender. On top of looking for the best mortgage deal, it is important to consider which lender you can see yourself working with for the life of the loan.

It is recommended that you take your time shopping around and consider all of your mortgage lender options. One lender may offer good deals, but not service the type of loan you are interested in. Here are some questions you can ask prospective lenders:

• What mortgage products and mortgage terms do you offer?

• Do you service the loans you originate?

• Which mortgage type may be best for me?

Once you have narrowed your options and have selected a lender, it is time to apply for pre-approval. Upon receiving your application request, the lender will provide you with a loan estimate that will give you an accounting of all of your costs to give an estimate of the total mortgage loan amount.

Though the final costs may be different, a loan estimate will give you an approximate amount that you are likely to pay for the mortgage so that you can begin searching for homes in the right price range.