Purchasing a home is one of the biggest financial decisions you’ll make in your life. A mortgage is a necessary part of the process for most people, but it’s important to be aware of the hidden costs that come along with it. In this article, we’ll discuss the hidden costs of mortgages and what you need to know before signing on the dotted line.
- Closing Costs
Closing costs are fees associated with finalizing the purchase of your home. These fees can include appraisal fees, title search fees, attorney fees, and more. The total cost of closing can vary depending on the state, the lender, and the type of loan you choose. Typically, closing costs range from 2-5% of the home’s purchase price.
It’s important to budget for these costs before you start the home buying process. You can ask your lender for an estimate of your closing costs, but keep in mind that these estimates are often low and the actual costs can be higher. Be sure to factor in these costs when determining how much house you can afford.
2. Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is required for many homebuyers who make a down payment of less than 20% of the home’s purchase price. PMI is designed to protect the lender in case you default on your loan. The cost of PMI can vary, but it typically ranges from 0.5% to 1% of the loan amount per year.
PMI can add a significant amount to your monthly mortgage payment, so it’s important to factor in this cost when determining how much house you can afford. Once you have paid down your mortgage balance to 80% of the home’s original appraised value, you can typically request to have your PMI removed.
3. Homeowners Insurance
Homeowners insurance is required by lenders to protect their investment in your home. The cost of homeowners insurance can vary depending on the location, size, and age of the home. You may be required to pay for your first year of homeowners insurance upfront at closing.
It’s important to shop around for homeowners insurance to ensure that you’re getting the best rate. You can also bundle your homeowners insurance with other insurance policies, such as auto insurance, for a discounted rate.
4. Property Taxes
Property taxes are another cost that you’ll need to factor into your monthly mortgage payment. Property taxes are based on the value of your home and are assessed by your local government. The cost of property taxes can vary widely depending on the location and value of your home.
When you apply for a mortgage, your lender will typically escrow your property taxes and homeowners insurance. This means that they will collect a portion of these costs each month along with your mortgage payment and pay them on your behalf when they’re due. Be sure to budget for property taxes when determining how much house you can afford.
5. Home Maintenance and Repairs
Home maintenance and repairs can be a significant expense over the life of your mortgage. It’s important to budget for these costs when determining how much house you can afford. As a homeowner, you’ll be responsible for maintaining and repairing your home, including things like HVAC systems, appliances, and the roof.
It’s a good idea to set aside money each month for home maintenance and repairs. This can help you to avoid unexpected expenses and keep your home in good condition.
6. Prepayment Penalties
Some mortgages may include prepayment penalties if you pay off your loan early. These penalties can be a percentage of the outstanding balance or a set amount. It’s important to read the fine print of your mortgage agreement to determine if prepayment penalties apply.