If you are considering getting a mortgage there are a few things you should know. Getting a mortgage is not easy for everyone, and at the same time there are costs involved. With that being said, before you invest in a mortgage application, here are some things to consider in determining if you are ready for a mortgage.
- Application Fee – There is always an application fee to apply for a mortgage. This fee may vary from bank to bank and may range from $65 to $640
- Down Payment– When making a purchase, you may make a down payment anywhere between 10 percent to 20 percent of the purchase price. However, it is recommended that you make a down payment of 20 percent or more because when your down payment is less than 20 percent you will be required to get Private Mortgage Insurance (PMI). PMI is basically an insurance that protects the lender against default of your mortgage. This is required because lending money to someone who provides a down payment of less than 20 percent is riskier than lending money to someone who provides 20 percent or more. Since PMI is an insurance, it is an extra cost that you will have to pay every month as part of your mortgage. Therefore, if you would like to keep down the cost of your monthly payments, it is best to make a 20 percent down payment.
- Closing Costs– Always remember that costs associated with getting a mortgage does not stop at the application fee, there are also closing costs. These costs include the underwriting process, obtaining the appraisal report, as well as the credit reports needed, the title/insurance search, flood certification and lenders attorney. Closing costs also include state taxes, which varies from area to area.These costs are generally 3 to 5 percent of the value of the property being purchased, it may be as high as 6 percent in areas with higher than average taxes. It is true that you can finance the closing costs using your mortgage, however this is not recommended due to 2 reasons: (1) this will drive up your mortgage amount, which means a higher monthly payment for you, and (2) this option requires you to take a higher interest rate than what you were originally offered, which means an even higher monthly payment. Therefore, it is always a better idea for you to pay your closing cost at closing, and before you get a mortgage make sure you have enough funds to do so.
- Insurance– When purchasing a home, you will also be required to get a property insurance policy that covers property damage. This is something that is paid in addition to your monthly mortgage payments and you may choose to have it escrowed into your monthly payments. This is something to always consider when you are looking into getting a mortgage as it is an unavoidable additional cost.
- Taxes– This is another unavoidable additional cost to consider as well. Like insurance, taxes can also be escrowed into your monthly payments.
- Reserve Requirements– This is not a cost, but it is a requirement. Reserves in mortgage underwriting, refer to the amount of funds you will have remaining after you have paid your application fee, your 20 percent down payment, and your closing costs. The more reserves you have the better, but the rule of thumb is that you should have at least 6 months of reserves remaining after all costs mentions above are paid. What this means is that you must have enough money in your liquid accounts to cover 6 months of mortgage payments, tax payments, insurance payments and maybe private mortgage insurance payments if it is required. However, if you have any additional financed properties, you will also have to have additional reserves set aside for each of those properties as well.
For more information about fees associated with mortgages you may visit the Federal Reserve web site at http://www.federalreserve.gov/pubs/settlement/.In the next post I will discuss some key ratios that determine if you are qualified for a mortgage.