If you have been through the mortgage home loan process before, the costs associated with them can still be confusing. We will explain all the mechanisms and costs associated with a mortgage so that you can better understand it.
When you purchase a house and get a loan, you’ll have to pay upfront costs and then regular monthly mortgage payments.
These upfront costs usually consist of your down payment and different other closing costs.
The Down Payment is the amount you’re putting upfront when buying a home (your lender will provide the rest as a loan). A 3-5% down payment is a financially sound option for creditworthy borrowers, although the industry benchmark is 20% down.
Outside parties usually charge third-party fees to make sure that the details and fine print linked to purchasing your new home are correctly handled. Third-party fees are divided into two distinct categories on your Loan Estimate (LE), and consist of:
- Services You Cannot Shop Around
These fees may vary between different lenders and can contain:
- Credit report fees
- Appraisal fees
- Homeowners’ association certification fees
- Flood certification fees
- Subordination fee
- Services You Can Shop Around
These services include title service fees, which mostly make sure that you have a proper legal claim to the house you’re buying. In the majority of states, the cost for performing your closing also becomes part of the title service fees.
- Taxes and different government fees
These fees include property taxes and recording fees. Rates of property taxes vary in different metropolises.
Prepaids are advanced payments for ongoing fees linked to your mortgage. These include homeowner’s insurance, daily interest, and property taxes. These costs will vary, as different insurance providers and metropolises want different amounts upfront. As you’ll pay these fees monthly or quarterly, your total prepaid cost at closing can be affected even by the day of the month. At the beginning of the process, your lender may provide you with different estimates on your initial LE. However, at the time of closing, all lenders will be collecting the same amount in prepaid.
Costs or Discounts Associated with your Interest Rate (credits or points)
Many different factors determine the interest rates available to you. These may include your credit score, type of loan, market, and details of your property.
However, you do have control over your interest rate. You have the option to pay the lender more upfront, in the form of discount points, to lower the interest rate. Or, you can opt for a higher interest rate with lender credits, which will decrease your closing costs. Every lender decides how much they will charge you in fees or points to give you lower interest rates.
Application fees, origination fees, and lender fees
These fees are in addition to the standard fees that third-party providers charge for the mortgage. At Texas Trust Home Loans, we will always have loan options available with no lender fees, and all of our mortgages have no application fees or origination fees. Remember, lenders may use these fees to balance the credits they are offering you for a specific interest rate. Don’t hesitate to ask your lender for the details of their pricing and charges, when they are giving you an official Loan Estimate.
Monthly loan payments
Your monthly loan payment or also known as “PITI” consists of four elements: Principal, Interest, Taxes, and Insurance.
The principal is the money that goes into settling the actual balance of your loan amount. You’ll pay less in principal at the start of the loan and more as the time goes on.
As the name suggests, the money goes in the amount of interest of your loan. You’ll pay more interest in the start and less as time goes by.
Property taxes vary from area to area and are determined locally. Property taxes can be very high in specific areas so that they can add a substantial amount in your loan’s monthly payment, and it’s always good to know the rates in advance.
Insurance can typically include PMI/MI (Private Mortgage Insurance / Mortgage Insurance); usually, you have to pay PMI/MI if you put less than 20% for the down payment and homeowner’s insurance.
The Changes That Can Occur in Your Monthly Mortgage Payments
If you have a 15-year or 30-year fixed term mortgage home loan, your principal and interest cost will stay the same throughout the loan (the ratio of principal and interest keeps changing though). In case you have an ARM (adjustable-rate mortgage), you will have to pay the same amount during the initial fixed period; however, after that period your interest rate will adjust, and there is a good chance that you have to pay a higher amount in the future.
Depending on inflation and additions or enhancements you make to your property, your insurance payment may increase every year. If you initially had PMI (private mortgage insurance), you may ask the lender to cancel it when you have paid down the mortgage balance to 80% of the home’s original appraised value. In other words, you must have at least 20% equity in the house to remove PMI.
Property taxes are connected with your home’s value, so if your home’s value increases over time, you’ll have to pay higher property taxes.
How to Get The Best-Priced Home Loan
- Ask for a Loan Estimate from all the different lenders you’re talking to.
- Compare all Loan Estimates. When comparing ensure that all LE’s have the same loan amount, terms, interest rates, and property value.
- Don’t give too much importance to other costs (taxes, prepaid, and government fees). As these costs will eventually be the same with all the lenders (If someone offers different estimates it may well be a red flag).
- Pay attention to the lender credits and total loan cost. It’s here where you’ll find out the difference in pricing of the different lenders. In your, LE looks at section A, along with section J with “Lender Credits” to correctly compare the difference between multiple lenders.
At Texas Trust Home Loans, we’ve removed our loan officers’ percentage-based commission, to pass the savings to you and make the mortgage process more efficient. Feel free to shop around once you get Loan Estimates from us. We are confident that our terms and rates will be the best among them.
Are You Ready to Start the Mortgage Journey?
We at Texas Trust Home Loans, want to give you a pleasant mortgage experience, not only we offer support but also transparency throughout this journey for your dream home. If you are still confused or need more information, we are just one call away.
For further information, please visit our website www.texastrustloans.com