If you have been lured into buying a house by today’s record-low interest rates and housing market boom, you are not alone. Just in January, the US reported a 6.7% increase in house sales, making available properties infinitely more desirable by new homebuyers and investors alike.
But before joining the race and taking out a home loan, it is essential to be clear on how much you can afford. And, yes, the hidden costs of conventional loans can throw you off balance – especially if you dive into the house buying process without setting clear expectations!
Here’s all you need to know before setting off on a hunt for your dream home.
Closing Costs
With a market share of 71.3%, conventional loans – or loans offered by private lenders and not backed by a government agency – are the most common mortgage solution for homebuyers.
That’s because these loans are sponsored by government-backed mortgage companies like Fannie Mae and Freddie Mac, are easily accessible, and provide the flexibility today’s buyers need.
While affordable to most buyers, they come with significant closing costs – also known as mortgage fees – which can take a toll on your budget if you haven’t factored them in.
Today, closing costs account for 3% to 6% of the property’s market value. For example, if you are buying a house worth $350,000 (around the median home price in the US), you should expect to pay between $10,500 and $21,000 in closing costs. And, these costs don’t include your downpayment!
Some of the mortgage fees you’ll face include:
- Loan origination fees
- Underwriting fees
- Mortgage or discount points
- Title search fees
- Home inspection and home appraisal fees
- Prepaid taxes
- Real estate commissions
- Attorney fees
- Transfer fees
Insurance Costs
Insurance costs are necessary and can be easily managed – if you know what to expect. While USDA and VA loans, conventional loans will require you to invest in Private Mortgage Insurance (PMI) if your downpayment is smaller than 20% or you own less than 20% of your home’s equity.
Today, just PMI for a conventional loan can be as expensive as 0.58% to 1.86% of your loan amount. This means that, for a $200,000 conventional loan, PMI can account for an additional $1160 to $3720 you’ll need to repay and factor into your monthly costs.
Additionally, you might require Homeowners Insurance (HOI), which is essential to secure your property investment against losses and accidents. The HOI premium can vary significantly depending on your home’s value, location, and features.
However, in the US, the homeowners need to afford $1,393 per year on average to provide coverage for their $250,000 property.
While HOI is a universal requirement, you can save on your PMI in two ways:
- Make sure to secure a 20% downpayment before applying for a mortgage or,
- Refinance your home after achieving the 20% equity mark to get rid of PMI (you can use a release equity calculator for this)
Long-Term Costs
Depending on your loan term, your conventional mortgage can have a lifespan of 8 to 30 years! So, while upfront fees are a significant cost to account for, you shouldn’t underestimate the impact of long-term costs. The most common ones include:
- Changes in the interest rate environment – a variable rate or tracker mortgage can be alluring in today’s low-interest-rate environment. However, your monthly payments could change as the financial environment does. Consider opting for fixed-term rates (at least for a few years) and improving your credit score to access a better deal.
- Late or early payment fees – while your mortgage terms work for you today, your financial situation can change over time. If you wish to prepay all or part of your mortgage, you’ll face fees as high as 2% of your outstanding principal. Consult with a Mortgage Advisor in Liverpool to learn more about this. On the other hand, late payment fees can cost you 4-5% of your principal!
Exiting a mortgage earlier than the loan’s agreement specifies will also come with significant fees.
A Surefire Way To Keep Costs Low: Work On Your Credit Score
Most of the posts above aren’t actually hidden, but specified on your agreement. Nonetheless, it is crucial to learn how you can save on your conventional loan.
And, the best way to do so is to review your starting credit score, manage your existing debt with refinancing providers like SoFi, and improve your overall financial snapshot.
By doing so, you can access lower interest rates, better conventional loan terms, and lower insurance fees.
Don’t forget that most of the closing costs of a mortgage can be folded into the mortgage. This is an excellent solution to dilute your upfront expenses, but you’ll pay interest on them. So, the lower your interest rates are, the better your entire mortgage deal will be! If you are ready to start looking for options, the Ohio FHA loan program is available to all buyers to promote homeownership.
