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Other Costs Associated with Your Mortgage

By Eleanor Boschert

There is more to the expense of a mortgage than meets the eye. Once you've gotten over the sticker shock of the big chunk of change you'll be paying off for years to come as a homeowner, you'll find extra costs associated with your entire real estate purchase. Be prepared to hand over thousands more before you even begin to think about finally getting the keys to your new home.

Down Payment

Your down payment will be a percentage of the final sale price needed to quality for a mortgage loan. Depending on whether you secure a FHA or conventional loan, your down payment will run you anywhere from 3.5% to 20%.

PMI or Mortgage Premiums

If you do not put down 20% for the loan, you more than likely will have to pay Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (PIM for FHA loans.) These vary depending on the size of your down payment and the mortgage amount, but generally can run you 0.3% to 1.15% of the loan. They are added into your monthly payment. You won't pay this forever though, for lenders are required to cancel PMI when your loan-to-value ratio hits 78%.

Closing Costs

You will be paying a range of standard closing costs and fees associated with the origination of the loan. These vary according to your loan, the terms, lender, and home state. Generally they will run you an average of 1% to 3% of the loan. You will need to pay some of these costs up front (such as credit report, inspection, appraisal, homeowner's insurance) or may be able to roll them into your loan. You should receive a comprehensive summary of all closing costs in a Good Faith Estimate provided to you by your lender when you originally applied for the loan.

You may be able to negotiate with the seller to either share closing costs or have them pay upfront. But, know that if you take this approach, you will be paying more for the purchase price of the home. In addition, if you decide to roll these costs into the loan, your interest rate will be higher, too.

Points

A sort of "pre-paid interest," points can help you earn a lower interest rate over the course of the loan. With one point equal to 1% of the loan, paying them upfront at the closing will also lower your monthly mortgage and contribute to paying down your principle.

Escrow Account

You will be required to set up an escrow account with your lender. A sort of "savings account," you will deposit about nine month's worth of property taxes and about two month's worth of insurance payments in it. While you pay your monthly mortgage amount to your lender, they in turn, will pay the taxes and insurance as they come due.

Be prepared to also pay the first year of your homeowner's insurance upfront. Your premium can vary widely, depending on the amount and type of coverage you choose. Where you live, the size and condition of your house and the state your live in figure into your premium costs also. According to the Federal Reserve Bureau, the average cost of an annual premium for homeowners insurance is between $300 and $1,000.

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