A new survey shows 94 percent of prospective home buyers believe they’re going to be making a good investment, according to a poll conducted for Discover Home Loans. A large majority of these soon-to-be buyers are confident in their ability to secure an affordable loan and obtain the type of property they want while most have been pre-qualified for a home loan.
Sixty percent of these prospective home buyers began their home search after at least one of the following took place (in roughly equal numbers):
Having achieved sufficient financial stability
The market becoming more affordable
Improved credit scores to qualify for better mortgages
Mortgage rates and lending options becoming more affordable
Having saved enough for a down payment
Despite feeling financially prepared to buy however, many home buyers don’t know the hidden costs of purchasing a home. Only 52 percent have actually determined what their projected monthly payment may be. Forty-one percent have yet to calculate their down payment. Forty-eight percent don’t know how much their mortgage payment would be if they chose a more or less expensive property.
Too much information
For the most part, the majority of those looking to purchase a home, find information about the financing process overwhelming. Nearly two-thirds feel that way, especially those under the age of 30. Three-quarters of first-time buyers report feeling overwhelmed, versus 54 percent of those who have owned a home previously. While 87 percent are confident they will find an affordable home loan, many don’t know how to compute the costs of that loan, and most don’t know where to turn for simple answers.
“The industry is becoming more transparent in an effort to help home buyers become informed,” said Cameron Findlay, chief economist at Discover Home Loans. “The sheer amount of information can lead to confusion and stress. Those looking to purchase should work closely with their lender and realtor to make sure they are comfortable with mortgage terms and understand the impact a loan will have on their finances.”
Prospective home buyers turn to a variety of different resources to help them make key decisions and understand the process. For help determining whether buying a particular home would be a good investment, 66 percent of prospective buyers turn to real estate agents. When evaluating mortgage terms and comparing offers, 59 percent turn to mortgage bankers.
Many find that it can be helpful in such an important financial undertaking to compile a checklist of all the possible hidden home purchase costs.
The key costs of a mortgage
The total cost of a mortgage consists of four elements often referred to by the acronym PITI: principal, interest, taxes and insurance. Principal represents the amount of money loaned to you. Interest is the cost of that money calculated over time. Taxes are government assessments to pay for local services. Insurance assures the value of the loan by protecting the home from damage or loss and assures the value of the loan.
To get an idea of what the latest mortgage rates are in your area, see below.
Your lender must document all the details of your loan so you know the amount of principal, interest and all fees involved, including loan points. A point is equal to one percent of the total amount of your loan (not the purchase price of the home). For a $200,000 mortgage, one point is $2,000. There are two types of points. A loan origination fee, sometimes called origination points, is paid to your lender for getting you the loan. Discount points are, in effect, prepaid interest to lower your long-term interest rate.
In most cases, for property taxes and insurance, mortgage lenders will make the collection by allocating the amount you need to pay for taxes and insurance each month to your mortgage payment. These collections are placed in escrow, a depository account that the lender manages.
Your county and city may levy taxes on your real estate property. These taxes pay for government services such as schools, roads, police, and other community services. Your annual tax is usually calculated as a percentage (factor) of your property’s sale price.
You’ll also be required to carry hazard insurance on your home to protect it against fire, flood or other natural disaster that could damage or destroy the home.
There may be other costs included in your escrow payment such as private mortgage insurance (PMI). PMI is required on most loans with less than 20 percent down payment. It is designed to compensate the lender if the homeowner should default.
There are a few other expenses that may factor into your monthly home payment. The most common of these affects owners of condominiums and are called homeowners association dues. Homeowners within a shared complex pay monthly fees that cover the cost of building operation, maintenance, repairs and sometimes utilities.
Transaction closing costs
In any real estate transaction you have closing costs, some are covered by the buyer and others covered by the seller. Examples of buyer closing costs would include escrow fees, appraisal and inspection fees, prorated adjustments for property taxes and homeowner’s association dues. Each party in the transaction could pay all their own closing costs, but sometimes deals are negotiated in which one side pays some or all of the other side’s costs.
It’s nearly impossible to determine the exact amount of closing costs prior to closing because there are so many variables involved and so much can change between the date the purchase offer is made and the date of closing. However, your escrow officer or real estate broker should be able to provide a reasonable estimate.
Still more hidden home purchase costs
After listing all the different costs associated with the purchase, the mortgage loan and the escrow, don’t forget to consider and budget for the indirect costs. Your new home may need improvements like new carpet, paint, counter tops, or any number of other expenses. Improving a “fixer-upper” will of course cost more. And over the life of a home you may need to repair or replace roofs, furnaces, windows, or almost any other feature of your home — so budget for maintenance.
If it’s your first home, you may need additional furnishings for it. Coming from a small place you may find utility costs a surprise because water, lights, heating and air conditioning for a bigger house are more expensive. Finally, moving your household into your new address can also be a considerable expense depending on how much and how far you’re moving.