Most homebuyers must finance their purchases with a special loan called a mortgage. When you are shopping around for a new mortgage, it is very important to work out the true cost of the home loan before you sign on the dotted line.
Here’s how to work out the total cost of a mortgage so you can find the best mortgage rates.
Start with your principal amount
This is the amount that you actually borrow to pay for your new home. Determine whether you have a fixed-rate mortgage or an adjustable-length mortgage.
The annual percentage rate (APR) is how much the mortgage lenders will charge you for using their money during your repayment schedule. The APR is a percentage of the principal.
Fixed-rate mortgages are easy to figure out since the interest rates never change. Start by taking the cost of your home and deduct the down payment. After that, divide that number by the amount of payments you will make during the duration of the loan. Multiply this number by the interest rate and you’ll have your total interest costs.
Calculating an adjustable-rate mortgage is a bit trickier because you must predict how the interest rates will fluctuate in the future. You could ask your lender or a financial adviser to estimate the interest rates for the next few years.
Once you have an average rate of interest, simply use the same formula above to determine the total amount of interest you will pay over the life of the mortgage.
Determine your local property taxes
Annual property taxes are typically a percentage of your property’s appraised market value. Contact your local county and city officials to find out your local tax rate. Multiply that number by the length of your loan term and you have your total property taxes.
Include your insurance premiums
If you are going to use a down payment of less than 20% of the home’s purchase price, your mortgage lender will require you to get private mortgage insurance (PMI) that protects the lender in case you default on your loan.
The national average annual percentage for PMIs is about 0.005 of your balance, but you should check with your lender to find out the average rate in your area. Find out the annual percentage and multiply that with the length of your loan term to determine your insurance premium total.
Find out all of the fees associated with a mortgage
Unfortunately, all mortgages require that you pay a lot of fees. Some of the more common fees are appraisal fees, application fees, loan origination fees, FHA fees and the fee charged by the home inspector.
All of those fees can up to thousands of dollars. Include the cost of all those fees into the total cost of your mortgage.
The bottom line
Add together your principal, total interest, insurance premiums and total fees and you have the true cost of a mortgage. It never hurts to double check your calculations with a free online mortgage calculator.