Don't Let These Hidden Mortgage Costs Catch You by Surprise
✦ 5-minute read ✦
Becoming a homeowner is an exciting time, filled with planning, packing and endless possibilities. No doubt about it, taking out a mortgage is the biggest and longest financial commitment a person can make. As you set yourself on the path towards becoming a homeowner, be aware of these hidden fees so you can put your best foot forward.
You’ve finally done it! You’ve found the home of your dreams. You’ve examined your finances, done your research and you’re finally ready to make an offer - but before it’s time to celebrate - it’s in your best interest to pay up some earnest money.
Earnest money works a bit like a security deposit. By putting some money down to the seller when making an offer on a home, you’re letting them know you’re serious and committed to the property. In theory, earnest money demonstrates that you aren’t going to make an offer on one property and then immediately turn around and buy someone else’s property.
The amount can vary, but most people pay between $500 and $1,000 in earnest money. In most cases, you’ll get the money back or eventually put it towards the purchase of your home, but beware: if financing falls through on your end, you may never see that money again.
Ready to become a homeowner? Compare top mortgage lenders:
Quicken Loans offers up to $3 million in loans for qualifying borrowers, and both the application and approval process go very quickly due to the top-rated technology Quicken Loans uses. Rates are updated on a daily basis, so don’t be surprised to receive different quotes on different days. The upside is, Quicken offers a large variety of mortgage options, including 15 year options, and has specific loans for low-credit situations.
- Minimum down payment of 3% on government back loans, 5% on conventional loans%
- Fast online application
- Live chat
Best for: Tech-friendly borrowers who want access on all their devices
Best perk: Low-credit option
RefiRateGuide is a loan marketplace that allows you to search its network partners and find the mortgage that’s best for you. Using RefiRateGuide is free and doesn’t affect your credit score, which means you can search risk-free. What’s more, because it has so many partners, you can find the best loans to suit your specific financial situation and repayment needs.
- Fast & easy-to-use
- One form for multiple lenders
Best for: Borrowers looking to compare rates and options quickly
Best perk: Comparing won't impact your credit score
“Closing costs” are plural for a reason - this term encompasses a slew of expenses that come at the end of a real estate transaction.
Closing costs include (but are not limited to): government fees, mortgage origination fees, title insurance, insurance (see below), taxes, credit report, appraisal, real estate agent commission and more.
Government fees: government recording fees are assessed by the state in order to record your deed in official government records.
Mortgage origination: these fees pay the mortgage loan provider for processing your home loan.
Title insurance: protects homeowners in the event that title disputes are made on your home after closing.
Taxes: you will owe a year’s worth of county and state taxes at closing, this upfront payment will be placed in escrow along with your initial insurance payment.
Credit Report: When you apply for a loan, the lender pulls your credit report to get a look at your credit score as well as your debt-to-income ratio (DTI). This typically will run the borrower around $30, which will build into the loan costs.
Appraisal: If you're looking to buy a home, you'll need to have it appraised by a professional. The appraiser is there to answer two questions: Is the home in livable condition? and secondly, what is the market value of the home? Mortgage lenders cannot give you more on a home loan than the property is valued for, meaning if the seller is charging higher than market value, you will have to pay the difference up front. The appraisal helps the lender, borrower and home seller come to an agreement on the price of the home, and also gives you, the borrower, the opportunity to reconsider, negotiate and even walk away if you feel you're not getting a good deal.
All in all, mortgage closing costs come to around 2 to 5 percent of the value of your home. So, if your home is valued at $400,000, you’ll have to shell out anywhere between $8,000 - $20,000 on closing costs.
Some homeowners choose to pay off their closing costs in a lump sum along with their down payment, while others roll closing costs into their home loan. Whatever you decide to do, be sure to consider closing costs on your journey to becoming a homeowner.
Homeowner’s insurance, like state and county taxes, is a closing mortgage cost and a continuous payment that comes with being a homeowner.
Homeowner’s insurance covers damages to a home’s structure, along with damages to furniture and other assets found inside of your home.
As far as hidden costs go, homeowner’s insurance can feel downright invisible. Insurance payments are conveniently rolled into your monthly mortgage payments, but you’re expected to provide up to 12 months of homeowner’s insurance up front. This upfront payment is placed in escrow - a third-party payment system with which the mortgage lender can allocate borrower funds.
Why do lenders care so much about insurance?
Well, it’s in the mortgage provider’s best interest to guarantee that insurance is paid on the property upfront to best protect their investment. If your house were to go up in the flames a week after you moved in, before you managed to make a single insurance payment, the mortgage company would suffer a significant loss on the value of the property.
After the initial 12-month homeowner’s insurance payment, homeowners don’t feel much of a sting when it comes to this expense - on average, American’s pay a little over $100 a month on coverage.
Keep in mind that homeowner’s insurance rates can vary. If you live in an area that is prone to extreme weather like Florida (hurricanes) or California (wildfires/earthquakes), you will likely find your homeowner’s insurance costs become significantly higher, with monthly payments coming in at around $300 a month.
When it comes to real estate, you know what they say: location, location, location!
Now, in the home buying process, interest rate might not feel like a hidden cost, but many homeowners don’t fully understand what goes into their interest rate, making their monthly mortgage payments and terms a mystery.
Credit score is the metric used by mortgage lenders to determine the risk a borrower presents. The higher your credit score, the more likely you are to pay back your home loan in a complete and timely matter. Credit score is determined by evaluating how you pay your debts and how much debt you owe. If you pay your credit card bills in full and on time (or early), your credit score will be higher than someone who pays the minimum balance on their credit score a few days late every month.
Take a close look at your credit score and strategize ways to improve it before committing to a mortgage. Lowering your interest rate by just a half of a percent could end up saving you tens of thousands of thousands of dollars over the lifetime of your home loan.