Homebuyers that are planning on financing their home need to do it through a loan called a mortgage and it is very important that you calculate the true cost of the mortgage loan before you sign any contracts. Here is a simple way to work out the costs, allowing you to find the best mortgage loan rates available.
Start with the principal amount
This is the total amount that you will actually be borrowing to pay for your home. You need to figure out whether you have an adjustable-length mortgage or a fixed-rate mortgage. The annual percentage rate (APR) is the amount that the mortgage lenders are going to charge you for using their money. The APR is a percentage calculated of the principal.
Fixed-rates are simple to figure out because the interest rates are never going to change. Taking the cost of the home you want to buy and deduct the down payment from that amount, then divide that amount by the number of payments you will make over the loan period. Multiply this amount by the current interest rate and you will then see what the total interest costs will be.
Working out an adjustable-rate mortgage is slightly more involved because you will need to be able to predict how the interest rates will change in the future. You could ask a financial adviser to estimate the interest rate changes over the next few years. When you have an average, use the same steps as above to figure out the total amount of interest you will pay.
Determine what your local property taxes will be
Annual property taxes are normally calculated as a percentage of a property’s market value. Get in touch with your local city officials to find out what your local tax rate will be. Multiply that amount by the number of months you will be paying back the home loan and you have your total property taxes.
Include insurance premiums
If you are going to pay less than 20% as a deposit, your mortgage lender will require you to get private mortgage insurance (PMI), which protects the lender in case you cannot make a payment on your loan. The average annual percentage is about 0.005 of your balance, but it is advisable that you double check with your lender to make sure what the average rate is in your area. Get the annual percentage and multiply that number with the number of months of your loan term to get the total of your insurance premium.
Know what all the fees associated with a mortgage are
Unfortunately for everyone, all mortgages come with you a lot of fees. Some of these fees are application fees, appraisal fees, loan origination fees, and the fee charged by the home inspector. These fees can add up to thousands. It is important that you include all these fees into the cost of your mortgage loan.