- August 1, 2014
- Posted by: U.S. Title Records
- Category: deed, deed of trust, Lien and Title Search, mortgage, property deed, Property records, Property records search, PROPERTY TITLE SEARCH, Real Estate, Title companies, Title reports, what is a mortgage?
What Costs Are Involved In Mortgages?
Owning your own home is not only personally rewarding, but it is also financially beneficial. Unlike other assets, real estate typically appreciates over time. Thus, a $100,000 home may triple in value over the course of 30 years. While location, size, neighborhood, and market price are all important elements to consider, financing is usually the primary concern for most first-time buyers. After all, your home will likely be the largest purchase you will ever make. Likewise, it will certainly be one your biggest investments. If you are like most Americans, however, you probably lack the resources to purchase your home in cash. That is where mortgages come in play.
A mortgage is an agreement for a loan that buyers use to purchase a piece of real property, or real estate. In some cases, home loans are furnished with a deed of trust (DOT). After the Great Depression, America evolved into a nation of people eager to own their own property. Fortunately, many government regulations have been put in place to increase the availability of financing this American dream.
A mortgage loan is anything but a short-term commitment. Most are set up to collect payments typically for 15 to 30 years. Therefore, it is important for potential buyers to become familiar with the various financial costs and loans types that are involved in the process, as mortgages are about much more than just the mere sales price.
When you sign a loan contract, you are agreeing to pay back the amount of the loan along with all accumulated interest and any other accompanying taxes and fees. The home that you purchase serves as collateral (property lien) for the entire term of your loan, up until you sign your final mortgage release that declares your loan as having been paid in full.
In addition to sales price, there are administrative and service fees involved with the purchase of real estate. First-time home buyers are often confused with the idea of closing costs, for this term does encompass a wide range of miscellaneous fees that accompanying mortgages. Typically, this includes appraisal fees, inspection fees, loan application fees, title fees, broker commission, and any pro-rated tax or insurance. Depending on the type of sale, you may or may not be responsible for paying closing costs. In a case involving an eager seller, you as the buyer may only be responsible for a portion of these fees. Nonetheless, closing costs, on average, are typically anywhere from two to five percent of the purchase price. Depending on the lender and the type of loan, these fees are often combined or rolled into the mortgage. If not, you will be required to make separate payments or pay the costs upfront.
Next, it is important to understand the difference between principal payment and interest payment. Your principal amount is the total amount of money that you borrow to purchase your property – essentially the home’s final selling price plus closing costs, if applicable. The amount usually depends on how much money you hand over as a down payment before the loan is written up. While it varies with each lender and loan type, the standard down payment today in the United States is 20% of a home’s total purchase price. The higher your down payment is, the lower your monthly principal payments will be.
Unfortunately, mortgages are not given away for free. Lenders earn a profit by charging you a fee to borrow their money. This is called interest, and is usually expressed as a percentage known as an interest rate. Because loans are underwritten for a specific period of time, you can determine the total amount of interest you will pay based on your monthly payment. Each month, your payment will serve both your principal amount and your interest amount. During the first few years of your loan, however, most of your monthly payment will likely be put toward your interest charges. The latter years will then be used to pay off the bulk of your principal. Deciphering the amounts of these two payments within mortgages is a process known as amortization.
Another financial element of real-estate ownership is property tax. Like regular sales tax, these are fees collected by your community or city based on the value of your home and land. The money goes towards local infrastructure and public services. If you are unable to provide a down payment of at least 20%, your lender may consider you as a higher-risk applicant. Therefore, they are likely to bunch your property taxes into monthly payments. This is a way lenders protect themselves, as they are the lien holders on all of the mortgages they give out. Thus, they want to make sure that the local government is being paid. Banks will typically hold this money in a separate escrow account from which they will pay taxes on an annual basis. Whether or not your taxes are included as part of your loan, all homeowners are required to pay property taxes as long as they own a real estate.
A final cost of home ownership is insurance. Homeowner’s insurance covers you in the event of a fire, theft, a flood, or other man-made or natural disaster. Few lenders are willing to take the risk on mortgages for homes that are not properly protected. Again, this may be incorporated into your monthly payments, or otherwise addressed separately. Once you pay off your loan, you may then choose whether or not to remain protected.
The mortgage process can be a daunting task; however, with a little information, any first-time buyer can have pleasant experience. It’s all about knowing where each dollar is going to create that long-term plan of ownership.
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