In a recent blog post, the CFPB made some interesting points about mortgage calculators. That they are practical tools to help you figure out how much you can afford to borrow at the onset of your home and loan shopping. This leads us to what goes into your monthly loan payment and how much it entails when you finance your first home purchase. Consider this a good way to set your expectations for the financial responsibility ahead of you.
Principal + Interest + Tax + Insurance Make a Mortgage Payment
In a loan payment calculator, you input the total amount, the down payment, the interest rate, and the amortization period. Say you take out a $200,000 mortgage with a 3.5% down payment of $7,000 with an interest rate of 4.06% on a 30 year-term. Your monthly payment will be $928.10.
But that calculation only covers the principal and interest; don’t forget the property tax and homeowner’s insurance. These four form the monthly payment or PITI.
- Property tax. This is assessed on your property and computed as either a rate or a percentage of the home’s market value. Effective rates vary among states but could go as high as 2.29% per year. You can ask the neighbors around or go straight to the local tax assessor.
- Homeowner’s insurance. A standard home insurance protects your home from most disasters, except for floods and earthquakes which require a separate insurance policy. Damage to your home caused by poor maintenance is your responsibility. Contact an insurer for a ballpark figure.
The property tax and homeowner’s insurance component is escrowed to ensure the timely payment of these obligations.
In the example above, you are making a 3.5% down payment. That means you have to pay for a private mortgage insurance on a conventional loan or a mortgage insurance premium on an FHA loan. This type of insurance is required on home loans whose down payment is below 20% of the purchase price.
A PMI can cost between 0.50% and 1% of the total loan amount while an FHA MIP requires an upfront and an annual fee paid monthly. The monthly insurance premium is paid on top of your mortgage payment.
While not exactly part of the monthly loan payments, factor in a homeowners’ association fee for condominium units and certain neighborhoods.
Interest Rates Can Change
The interest rate you’ve been eyeing now or used in the mortgage calculator is not exactly what you will secure when you get approved for a home loan. In a macro-scale, mortgage rates are pushed up and down by market forces and economic policies.
From your end, a rate depends on a number of things like credit score, debt-to-income ratio, down payment, the loan amount, the loan type, the interest rate type, and even the home location.
You Pay These to Process and Close Your Loan Application
When you apply for a mortgage, expect to incur a number of expenses associated with originating and closing the loan. These are primarily:
- Origination fees. These cover the costs of processing your loan by the lender. From verifying your documents, pulling up your credit report, underwriting your loan and more.
- Discount points. These are paid to the lenders at closing and useful in buying down your rate.
- Third party fees. These are paid to the appraiser, the title company, the homeowners insurance carrier, the local recording office, and any other service providers relating to the loan.
- Government loan-related fees. A VA loan, for instance, requires a VA funding fee at closing.
There may be other costs that you have to pay to successfully close your loan. Some loan fees have to be paid upfront but others can be financed into the loan per your arrangement with a lender.