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What Will My Mortgage Really Cost?

By Elizabeth R. Elstien

A major kitchen remodel would have most homeowners getting at least two estimates from different contractors to get the lowest price. Yet homebuyers rarely get more than one estimate for a mortgage loan. A home loan reflects the biggest purchase most people will ever make and it will take many long years to repay. Doesn't it make sense to get a few mortgage estimates when buying a home to pay the least amount possible?

A lender is required to provide a good-faith estimate at the start of a home purchase. This estimate details all the loan and closing costs, including mortgage terms, interest rate and estimated loan costs. Costs will vary between lenders, so it's best for a homebuyer to shop around and get the best mortgage terms possible, even if it means filling out a few applications with different lenders.

Be aware that all costs are not detailed and some are grouped together on the estimate. Therefore, the homebuyer must asked questions and make sure there are no unusual or extra charges. Discuss the estimate with your real estate agent and/or attorney specializing in real estate for further assistance. Once a homebuyer selects a lender, the interest rate should be locked in with that lender to assure that it will not change for a specified time period to allow for time to close the home purchase.

Note that the good-faith estimate will differ from the final HUD-1 form detailing all closing costs. Look both over carefully and question anything you are uncertain of.

Now that the lender has been picked and the interest rate is locked in, let's look at what makes up your monthly mortgage payment. The list below should generate additional questions for you to ask your lender to make sure your mortgage loan is what you want.

  • Principal. This is the basic amount of your loan broken up into monthly payments. Other charges listed below are added to this base amount. If you want to pay the mortgage off faster and have the means, pay an extra monthly payment of any amount you can afford each month and make it very clear on your payment that this is to be applied to the "principal only". The loan will be paid off several years earlier and with less interest paid if you make extra payments to the principal. Way before closing, be certain there is no prepayment penalty on your mortgage loan, which may offset any extra funds you have paid on the principal.
  • Interest. It's the cost of borrowing money. This is the amount of interest paid each month over the life of the loan. The amount depends on the interest rate of your mortgage, so try to get the lowest possible interest rate when choosing a lender.
  • Private Mortgage Insurance (PMI). If your down payment was less than 20 percent of the purchase price, PMI will be an added cost to your monthly payment in the amount of one percent or less of the total loan value. This is mandatory lender insurance in case you default on your loan, although some federal loans do not require PMI. The amount added to your loan payment each month is based on your loan terms and down payment amount. Once your equity reaches 20 percent based on a current appraisal that you pay for, ask the lender or servicer to cancel PMI to decrease your payments. Some lenders, however, require that PMI be paid for a fixed time period before it can be cancelled, even if you have already paid at least 20 percent of the loan. Speak with the lender/servicer before getting any appraisal completed.
  • Property Taxes. Homeowners have no choice but to pay taxes to the city and/or state. The taxes for the year will be divided by 12 and added to your monthly mortgage payment. This amount will vary each year and will be held in a third-party (escrow) account until payment is due, which the lender/servicer will pay. You can opt to not have property taxes included in your mortgage, but you must pay them yourself. A lien can be placed on your home if not paid.
  • Homeowner's Insurance. Lenders require that a homeowner have insurance on the home to protect the investment. Similar to property taxes, you may be requested to pay this amount into an escrow account to be paid by the lender/servicer when due. This amount is not fixed and may change each year.

Get the best deal on your mortgage loan, ask questions of your lender and others involved in your home purchase and decide what you want included in your mortgage payments. Taking into account both closing costs and monthly payments is the only way you will know what your mortgage loan will really cost you.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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