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How Much Your Mortgage Will Really Cost

By Thomas Mitchell

Every mortgage payment you make covers more than just a payment toward the principal loan. There are additional fees associated with most mortgages that wind up getting wrapped in with each payment. There are also costs that arise before you make your first mortgage payment. These fees include loan discount points, closing costs, and prepaid items as well. Let's look at these more in depth.

Closing costs are all the expenses a lender charges right before you receive the loan. Some of the costs have to do with your loan application, like the fee for freshly updated credit reports on all applicants. Some other fees have to do with the house itself like the appraisal of the property. Other fees may include a payment to the lender for processing your application, like the loan origination fee. These costs are usually all lumped into one category called "closing costs". Sometime the seller may offer to cover these expenses for the buyer but if not, they are left up to the buyer to pay. It usually totals 2-3% of the total loan amount. The fee is not always the same in all parts of the country so it's important to speak with your lender and find out what the fees are. Loan discount points are basically a type of prepaid interest. One point is equal to one percent of the amount borrowed. It's paid in cash to the lender after closing.

Prepaid items are also included in the costs of getting a mortgage. Many home lenders will want you to set up an escrow account, which is basically a savings account that the lender holds for you. Every month when you make your loan payment you will pay some for property taxes and insurance in the escrow account too. On the day you purchase the home, you'll be required to set up an escrow account with at least nine months worth of taxes and two months worth of insurance payments. You are also going to have to pay for the first year's insurance policy in full. All of these things together form to make up the prepaid costs. All customs and regulations vary from state to state in the US.

Together, closing costs, loan discount points, and prepaid items make up the total cost of getting a mortgage.

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