If you are in the market for a new home, you have probably heard that your monthly mortgage payment will include something called “mortgage insurance.” But, if you’re like most people, you’re also wondering, what is mortgage insurance and who is it insuring? Let’s break it down.
I. What is mortgage insurance?
Mortgage insurance is what it sounds like – insurance on your mortgage. But, it doesn’t insure you. Instead, it is insurance for the lender, reducing their risk on the money they lend. Mortgage insurance is the reason that lenders are able to loan large amounts of money with small down payments. It gives your lender a guarantee that they will recover some money if you default on your mortgage payments.
The only way to avoid mortgage insurance is to make a down payment of 20% or more of the value of the home when you purchase it. A conventional loan with 80% or less loan to value ratio does not require mortgage insurance.
The amount of your mortgage insurance depends on 1) the type of loan you have, and 2) the amount of your loan. Let’s look at the different types below.
II. Types of mortgage insurance
Private Mortgage Insurance (PMI) is mortgage insurance on a private (non-government) loan. This is what is usually going to be referred to as a conventional loan. The rates for private mortgage insurance will vary, but .62% is somewhat of a standard number. This is an annual rate, meaning you will pay .62% of your loan amount each year in mortgage insurance. So, for a $200,000 loan, your annual PMI might be approximately $1,240, or $103 per month.
All FHA loans require mortgage insurance. If you have an FHA loan with less than a 10% down payment, you will pay mortgage insurance for the life of that loan. If your down payment is more than 10%, your mortgage insurance will go away after 11 years of payments.
MIP has two types of insurance. The first is upfront mortgage insurance premium, and the second is annual mortgage insurance. The upfront premium is collected at closing, and is typically 1.75% of your loan amount. This can be financed into your loan, so that you do not pay it out of pocket. The annual MIP premium is typically .85% of your loan amount.
The USDA Loan Program will finance 100% of your home purchase. USDA loans typically require both upfront and annual mortgage insurance. The upfront mortgage insurance is referred to as the USDA Guarantee Fee. This is typically 1% of your mortgage amount, and the annual premium is usually .35% of your loan amount.
VA Loans, available to eligible veterans and dependents, are the only mortgage program that have no mortgage insurance. However, the VA does charge what is called a “funding fee” when you close on your loan. This funding fee is much like the upfront mortgage insurance for FHA and USDA loans. It is typically 2.15% for a first time VA buyer (unless you make 5% or more down payment), and 3.3% for subsequent VA loans. It can also be included in your financed amount. This is one of many reasons that VA loans are very popular for eligible borrowers – no down payment is required, interest rates are typically very favorable, and there are no monthly payments for mortgage insurance. It is also noteworthy that some eligible veterans with service connected disability compensation.
III. Can I get rid of mortgage insurance?
We talked above about a few ways to avoid mortgage insurance:
If you’re not in one of those categories, here are a couple of other ways to escape mortgage insurance payments:
Mortgage insurance is another important factor in considering what goes into the costs of your mortgage. Knowledge is certainly power when it comes to buying a home and taking out a mortgage. If you are in the home buying process, be sure that you are asking questions and getting meaningful advice from your loan officer. Call us today if you have questions!
Davis Love Pathway Mortgage NLMS: 1866217
What’s the first thing you do when you decide you want to buy a home? My guess is you go to Google and search “homes for sale” in the area you want to buy. Or, maybe you search for local realtors and give the first one you like a call. That might make sense, because that’s who you are going to work with when it comes to finding your new home.
But, here’s something a lot of people don’t know: if you start your home search by talking to a loan officer and getting pre-approved, you will be ahead of the game, realtors will be excited to work with you, and you will increase your chances of getting your offer accepted.
I. Why start with a loan officer?
Here are the two most important reasons:
First, across the state of South Carolina, and most of the nation, we are in what most people call a “seller’s market.” This means that homes are in high demand, and they typically sell quickly, to the first qualified buyer who makes a good offer. In order to be that qualified buyer who comes to the table first with your offer, you need a pre-approval from a lender.
The second, related reason to get a pre-approval as your first step is that when you make that first call to a realtor, there’s a good chance they are going to ask you this question: “have you been pre-approved?” That’s because realtors know the point above, which is that you need to be qualified in order to make that offer.
So, let’s consider two scenarios.
John meets with a realtor, and says he wants to buy a home for $175,000. John’s realtor Jane does great work, and finds a home that fits all of John’s needs, listed for sale at $175,000. Jane sets up a time as soon as possible to show John the home, but John hasn’t called to find out if he can get pre-approved.
Mary, meanwhile, is working with realtor Mike. But, when she met with Mike for the first time, she brought him a pre-approval letter for $175,000. Mike finds the same home for Mary, and she goes and views the home just after John.
Both Mary and John decide offer the $175,000 asking price on the home. But, Mary is able to attach her pre-approval letter to her offer, while John’s offer is subject to an approval from a lender for the necessary financing.
It’s not hard to guess which buyer the seller is going to accept a contract from. They will take the pre-approved buyer who is one step ahead.
II. What is a Pre-Approval?
Now that you understand why a pre-approval is important, let’s talk about what that means. Well, it really means exactly what it says – your loan officer has gathered enough necessary information from you to determine that you can be approved for the loan amount you are seeking. A good loan officer will then confirm that with a letter that states you are pre-approved.
In order to pre-approve you for a loan, your loan officer will generally need four basic categories of information.
1. Credit Report
Your credit report is the first key piece of information in getting you approved for a mortgage loan. Your credit report shows your credit score, as well as your debts/liabilities. Your credit score determines whether you meet minimum credit standards to be qualified for a loan. Then, your monthly payment obligations are compared with your monthly income to determine your debt to income ratio. Your debt to income ratio is used to determine the dollar amount of mortgage for which you can be approved. In order to access your credit report, your mortgage broker will have to collect your birthday, your social security number, and your current address.
Your income is, of course, the other factor for your debt to income ratio. Your monthly income is compared to your monthly payments in order to determine the debt to income ratio. Your loan officer will need to know your current employer, your employer for the past two years, and your current income (hourly pay and number of hours per week/annual salary, etc.). Typically, providing one month of paystubs is the best way to show your income.
Your assets can are typically are money you have in different accounts, such as checking account(s) and savings account(s), 401k, IRA, stocks and bonds, and any other form of money accounts in your name. These assets are important for two reasons. First, they are used to verify that you have money available to make any required down payment and pay your closing costs. Second, they are used to determine that you have the required amount of reserves. Reserves are money that you will still have in your account after making your down payment and paying your closing costs, so that the lender can verify that you are able make a certain number of loan payments. Typically, the higher your credit score, the less reserves you will be required to show.
Your loan officer will likely need two months of bank statements to show your assets. Providing those statements up front is the best way to get this information, but you may be able to provide documentation later, and your approval will simply be conditioned on verifying the stated assets are available.
4. Background or family information
Depending on the loan you are applying for, some other information may be needed. For instance, for USDA loans, your loan officer will need to know how many family members will live in the home with you, and if you have any dependents. Other monthly expenses, like child support, are important to note as well. Your loan officer will go through these miscellaneous items with you prior to getting you pre-approved.
III. What if you don’t qualify?
If you find yourself in a situation where you aren’t quite ready to buy a home, a good loan officer will be able to help tell you what steps you need to take in order to be qualified. Perhaps you need to bump up your credit score a few points, but aren’t sure what the best way to do that would be. Maybe you need to save some more money, but don’t know exactly how much you’ll need to get the loan amount you want. A loan officer is your best resource in helping you work through those issues.
This point is also a great way to tell if the loan officer you talk to is one you want to work with. If the loan officer is not willing to spend some time talking to you about what steps you should take to get qualified, that may be a good sign that you should consider calling around to other loan officers.
The bottom line is this: getting in touch with a loan officer as soon as you are ready to buy a home will put you one step ahead of the game, and will help you get ahead of the curve when it comes to getting your offer accepted on the home that you love. A good loan officer will be thorough in gathering information from you on your first call or meeting, and will be able to get you a pre-approval letter quickly.
Do you ever wonder what you’re actually going to be paying for every month when you make a mortgage payment? Good news, it’s actually pretty simple.
For most, your monthly payment is going to include your mortgage payment and your escrow payment. In other words, your monthly payment on your statement is combined into one number, but each month you are paying these items:
Let’s go over the mortgage payment first, because that will apply to everyone. Your monthly mortgage payment is simply a set amount of money that is calculated so that the entire principal balance of your loan and all interest that accumulates over the loan term (i.e. 30 years or 15 years) will be paid off at the end of that term. If you have a $200,000 loan, over the term of your loan you will pay $200,000 in principal and a predetermined amount of interest based on your interest rate. But, your payments are designed so that you pay more interest early in the life of the loan, and more principal later in the life of the loan. So, your monthly mortgage payment will always cover both the principal and interest associated with your loan, and the amount paid each month will not change, but the way that payment is allocated changes throughout the life of the loan.
It’s important to note that this applies only to fixed loans. Other loan types, like Adjustable Rate Mortgages (ARM), might have adjusted payments at some point during the life of the loan.
If your “loan to value” is higher than 80%, you will also have an escrow account. See our previous post on escrow accounts for more details on what an escrow account is. What you should know in the context of your payment is this: if you have an escrow account, your monthly payment will include the payment to your escrow account. If your loan amount is more than 80% of the value of your house, you will have an escrow account. If it is less, you may have an escrow account, or you may be able to choose to pay those items separately.
The three categories are fairly simple. Your escrow account will include your property taxes, your homeowner’s insurance, and your monthly mortgage insurance payment. On most, but not all loan programs, the mortgage insurance may be canceled after a certain amount of time or reduction of your loan to value below 80%. Additionally, if you have a VA loan, you will not have mortgage insurance.
The escrow payment is where the greater variables lie in determining what your total monthly payment will be. The property taxes and homeowner’s insurance are annual fees that will be divided up for your payments each month. Your lender will perform an escrow analysis at least once a year to ensure they are collecting enough funds on a monthly basis to pay those bills when they are due. So, if your taxes go up (because taxes never go down, of course), or your homeowner’s insurance changes, your escrow payment will change and so your total monthly payment will change.
And that’s it! There are a lot of numbers involved when you get a mortgage, but if you want to know how your monthly payment is determined, these are the categories where you want to look closely.
Yes. At least, we're pretty sure it is.
According to Merriam-Webster.com, escrow means “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.”
The truth is, other than a strange word and a complex definition, escrow accounts as they apply to mortgages are pretty simple.
I mentioned escrow accounts in my last post, “How Much Does it Cost to Get a Mortgage?” I said that, basically your escrow account is a separate account from your mortgage that your lender uses to pay your homeowner’s insurance, mortgage insurance and property taxes.
What it means is this: when you get a mortgage, you have to pay four things - principal, interest, taxes and insurance (PITI). The principal and interest are what make up your actual mortgage. If you have a $200,000 loan, over the life of the loan you will pay $200,000 in principal, plus a calculated amount of interest based on, of course, your interest rate.
Your taxes and insurance, on the other hand, can be “escrowed.” As Merriam-Webster would tell you, that means they are held in trust (kept) by a third party (your lender) to be turned over to the grantee (the government and the insurance companies) only upon fulfillment of a condition (when they are due).
So, our dictionary friends of course aren’t wrong. The reason you have an “escrow account” separate from your mortgage is that your taxes and insurance aren’t owed to your lender, but rather to the government and to an insurance company. But, your lender uses the escrow account to collect that money on a monthly basis and hold it for those third parties to pay them when its due. This means that you just one big payment every month, and your lender/mortgage servicer can deal with making sure all the right people get their money at the right time.
When you close on your loan, you’re going to have to fund your escrow account. That’s because the lender wants to have some money in that account in the beginning to make sure they don’t get stuck with a bill with none of your money to pay it. That’s why you will see on your closing documents that you have an “initial escrow payment” that is significantly larger than your monrthly escrow payment will be.
Note that you aren’t always required to have an escrow account. Most lenders will require them at the beginning of the mortgage, for a certain amount of time, and until the loan reaches a certain loan to value (usually 80%). After that, you might be free to make the taxes and insurance payments directly.
Since we're talking about definitions, it's important to realize that "escrow" is used in a lot of different contexts in the financial and legal world. But, you don't need to worry about that when you're trying to figure out how to pay your mortgage.
At the end of the day, at least for purposes of a home loan, whether you refer to an escrow account, money that is escrowed, or your escrows, it’s simply a fancy old word used to decsribe the account that holds money you owe for taxes and insurance. You will make an initial deposit into that account when you close on your loan, and then you’ll make monthly payments into the account, which your lender will use to pay the government and insurance company.
Davis Love (864) 814-0710Davis@pathwaymortgage.org NMLS# 1866217
So you want to buy a home, and you need a mortgage. But how much is that going to cost, nevermind the big price tag on the house you want? This is hard information to find, and a difficult question to answer. But, with some knowledge about what kind of things you'll have to pay for, you can ask the right questions and make a much more educated guess.
Let’s start with a few easy points:
A survey published by ClosingCorp indicated average closing costs in South Carolina in 2018 were $2,352, plus prepaids, taxes and insurance.
Prepaids, taxes and insurance are reflected under “other costs” at closing, and often can add up to as much as the average closing costs
Cash to close = Down Payment + Closing Costs + Other Costs - Credits
The general term for the money you have to spend to get a mortgage is “closing costs.” Closing costs are exactly what they sound like: money that you have to pay in order to "close" your mortgage loan and get the funds to buy your new house. However, most definitions of closing costs won't include all of the “cash to close," that is, all of the money that you will have to pay at your closing.
These are common categories included in closing costs:
Credit Report Fee
Two important categories that are typically counted as “other costs” but will be a significant part of your cash to close are:
Initial Escrow Payment
Finally, there are four other key categories to consider:
Earnest Money Deposit
Discount Points/Lender Credits
OK, now that we have all of the confusing terms on the table, let’s talk about what it means to you.
Origination Charges. These are fees that your lender charges for giving you the money you need for your mortgage loan. These will vary based on your lender. The manner in which this is calculated also changes based on whether your loan is originated internally by the lender, or by an independent mortgage broker like us at Pathway Mortgage. That being said, you will typically find either a 0.5%-1% origination fee on your loan documents, or you will find a flat fee between $800-$1,100. If you are using an independent mortgage broker/originator like our office, note that our compensation is typically paid by the lender, and is accounted for in the interest rate that the lender offers.
Another item you will find under origination charges is “discount points.” These are discussed in somewhat more detail below, but a discount point is a fee charged by the lender in order to get the interest rate that is associated with your loan. A higher interest rate sometimes will have a credit, rather than a cost, associated with the rate.
Appraisal Fee. Generally speaking, all lenders will require the property to be appraised prior to funding a loan. Appraisal fees as of today are typically between $500-$600.
Credit Report Fee. Your lender will require an up to date credit report in your file. If your credit is in great shape and simply needs to be pulled one time, this fee is usually between $35-$50. If your credit needs some work, your loan originator may be able to help you make quick improvements and update your report, but this may include additional fees.
Attorney/Title Fees. In South Carolina, an attorney is required to perform your title work and settlement services. Therefore, you will have attorney and title fees as part of your closing costs, and the services are often all provided by the law firm who performs your closing. These fees of course vary depending on the firm you choose for your closing.
Mortgage Recording Fee. Your closing attorney/agent will have to record your mortgage. The typical cost for this currently in South Carolina is between $35-$40.
So, these are the big categories that are usually included in the definition of closing costs. As stated above, according to at least one survey, these costs on average in South Carolina added up to $2,352 in 2018.
But, the “other costs” category is a big part of what you have to pay at closing. To really know the amount of money you’ll need to pay to close on your loan, you need to factor in your prepaids and initial escrow payment.
Prepaids. Prepaids are charges that you will prepay at your closing for your homeowner’s insurance and interest charges.
Typically, your first full year of homeowner’s insurance will be collected at closing. The insurance policy that you choose for your home will have an annual premium associated with it, and the first full year will be due at closing. Homeowner’s insurance premiums vary significantly depending on your home value and the extent of coverage you choose, but on a home price around $200,000 can often be found between $600-$1,300. If you are in a flood hazard area or have other special considerations such as this, your insurance will be significantly higher.
Interest will be collected at the daily rate for your interest rate for the number of days between your closing date and the end of the month. For example, if your interest rate is 3.75% on a $200,000 loan, your daily interest would be $20.50. If your closing took place with 15 days left in the month, your prepaid interest would $20.50 x 15 days.
The moral of the story here is that your prepaids depend on 1) the cost of your homeowner’s insurance (which you are free to shop around for), and 2) how many days of interest need to be paid on the day of your closing.
Initial Escrow Payment. Most loans have an “escrow account.” At the risk of oversimplifying, an escrow account is a separate account from your mortgage that your lender uses to pay your homeowner’s insurance, mortgage insurance and property taxes. Therefore, like prepaids, this payment will depend on the cost of those items. Your lender will usually collect enough to have at least a few months "reserves" in your escrow account.
Again, prepaids and escrow are not included in the typical definition of closing costs, and you will see them lumped into the “other costs” category. This is because they are not necessarily the cost of getting a mortgage, so much as they are cost of owning a home. When you close on your mortgage, you are simply paying up front money that will then be spent on those items over time.
Mortgage Insurance/Funding Fees. One last category to note is mortgage insurance or VA Funding Fees. If you are getting a government backed or insured mortgage - FHA, USDA or VA - you will have either an upfront mortgage insurance fee or a VA funding fee added to your loan. A later post will discuss these in detail, but while they are reflected on your closing cost documents, these costs are typically included in your loan amount, rather than paid by you at closing. Therefore, you will see these charges on your loan documents on those types of mortgages, but typically they are going to increase the total amount of your loan, rather than be part of your cash to close.
As you can see, your prepaid items and initial escrow payment will usually add a significant dollar amount to your total cash to close.
Now that you have all of these variable costs in mind, let’s look at the other categories that are key in determining your cash to close:
Down Payment. This one is probably obvious. Most, but not all, loan programs require you to make a down payment equal to a certain percentage of your sales price. Your “cash to close” is essentially calculated by adding Down Payment + Closing Costs + Other Costs. Note that, depending on the deposits and credits identified in the categories below, your cash to close can sometimes be lower than your down payment amount.
Earnest Money Deposit. Most real estate contracts require you to deposit (i.e. write a check for) some amount of money when you enter into a contract to purchase a home. This amount often ranges between $500 - $2,000. When you close on your mortgage, the deposit that you made is credited towards your closing costs, and therefore subtracted from your cash to close number.
Seller Credits. Many buyers negotiate with sellers for the sellers to pay a certain amount of the buyer’s closing costs. These are reflected as “seller credits” on your loan documents, and will be subtracted from your cash to close number. Note, these will not change the money due at closing, they will simply move the amount from your column (the buyer) to the seller’s column.
Discount Points/Lender Credits. Finally, you should know that your interest rate comes at a price. In other words, you will usually either pay or receive a credit for the interest rate that is associated with your loan. This is reflected as a percentage of your loan amount. One “discount point” is equal to one percent of your loan. For example, if you have a 200,000 loan, and you want a 3.5% interest rate, which has a 1.0 discount point, you will pay at closing 1% of $200,000, or $2,000. Often times, these discount points are fractions of a point, such as .25%. On the other hand, your interest rate may come with a credit, such as -.25%. This means that you would receive a credit from the lender in the amount of .25% of your loan amount, and it would be reflected on your loan documents as a lender credit.
In sum, the answer to the question of “how much does it cost to get a mortgage” is, it depends. But I hope this article gives you an idea of some of the typical numbers. More importantly, I hope this article gives you an idea of what categories of costs you should be looking out for when you apply for a loan, and allows you to ask the right questions to make sure you’re getting the best loan for you!
Always feel free to call or email us for more information about the cost of getting a mortgage. --Davis Love (864) 814-0710Davis@pathwaymortgage.org NMLS# 1866217