A mortgage is one of the most popular ways to purchase a forever home. But if you don’t have any prior experience signing up for a home loan, the very thought of complicated terms and mortgage fees might be enough to stress you out.
While a home loan does have different conditions and fees associated with it, understanding the process helps you make an informed choice with ease. Besides knowing what type of future commitment you’re taking on, it also helps you make an informed decision about your initial costs.
To help you through this learning curve, here are some important factors to consider when choosing a home loan:
Mortgage Term
Before you plan to claim benefits such as the first-time homebuyer tax credit in Virginia, you need to learn how different mortgage terms can affect your home loan. A home loan’s duration ranges from 10 years to 30 years. If you go with a shorter term, you need to pay higher monthly payments but lower overall interest. On the other hand, going with a longer term lowers your monthly payments but increases your total cost.
Fixed-Rate vs. Adjustable-Rate
A fixed-rate mortgage calculates all of your future monthly payments at the same interest rate, which gives you equal monthly payments for the rest of your mortgage term. On the other hand, an adjustable-rate mortgage offers you a lower interest rate for the first few years before recalculating your interest and monthly payments every year afterwards. Similar to the debt service coverage ratio for investor loans, choosing how your interest is calculated is an important factor for individual mortgages.
Private Mortgage Insurance
Private mortgage insurance (PMI) insures your lender’s investment in instances where you stop making your monthly home loan payments. But the lender doesn’t pay for PMI; instead, you have to cover the PMI monthly charges within your mortgage payments. Some government-backed mortgages do not require you to pay PMI. But if you don’t qualify for those programs, you may need to focus on saving strategies such as managing your money through a mobile banking app.
Property Taxes and HOA Fees
Property taxes are typically levied annually, but some areas spread them out into monthly payments. When you take out a mortgage, your property taxes are included in your monthly payments by default. The taxes may vary according to your location, which makes it important for you to learn about them beforehand. For instance, if you are buying a home in Texas, you may want to learn how property taxes are assessed in Houston.
Loan Origination Fee
The loan origination fee is typically 1% of your total home loan amount, which makes it one of the priciest factors in mortgage closing costs. Before your lender starts charging interest on monthly payments, the loan origination fee acts as one of the largest returns on their investment. Since this cost is directly tied to your home’s total value, you may need to keep it in mind while using a real estate app to browse listings.
Appraisal Fees
The appraisal process requires a third-party expert to review the real-time value of the property that you want to buy. This sets the figure apart from the seller’s asking price and helps you and your lender determine the size of the loan that you need. This one-time fee can typically go up to $1,000. You can understand the difference between evaluation and appraisal by seeing how the processes vary for tax assessments and mortgage valuations.
Home Inspection Fees
A home inspection is another essential part of a mortgage application. This process involves third-party experts inspecting the condition of a home to determine if it has any major issues. You can get this inspection done before or after you make an offer to the seller. The inspection costs typically start from $250 and vary according to the area you live in. You can find licensed home inspectors through a home service platform.
Title, Credit Report, and Documentation Fees
Other one-time fees, such as those for the home title, credit report, and documentation, are also included in your mortgage closing costs. These fees usually fall around a few hundred dollars. You can inquire about them more at the time of filing your home loan application.
By going through this information, you can be more confident while navigating the maze of buying a home. This goes a long way towards ensuring your comfort during the process.