As with all loans, you’re charged interest on the amount that you borrow for
your mortgage. The interest is based upon interest rates set by the federal
government, as well as any rates that the bank or lender might be offering. The
interest that you have to pay on your mortgage will be figured from the
principal amount that you’re borrowing.
Taxes
When you purchase real estate, you’re going to have to pay property taxes on
it. Failure to pay these taxes could result in the property being seized by the
government, and that would be against the best interests of the lender…
therefore, a portion of your property taxes will often be added to your monthly
payments so that it can be placed in escrow (or held by a third party until a
certain time) until your property taxes are due.
Insurance
Since the lender that issued your mortgage has a definite interest in your
property until they get their money back, you’re going to need insurance. The
amount of insurance that you have can seriously influence your monthly
payments… having good coverage from fire, theft, and acts of nature can reduce
your payment a great deal. If you have less than 20% equity in your property
(equity meaning the portion of it that you’ve already paid for), then you’re
likely going to have to take out private mortgage insurance as well (also known
as PMI.) Private mortgage insurance can get rather expensive at times, so this
is another reason that it’s good to make a large down payment.
Closing Costs
Once you’ve gotten your mortgage approved and they’ve figured up the
payments using the PITI system, you’ve got to take care of your closing costs.
Closing costs are additional fees that cover the work that various members of
the mortgage, realty, and legal teams do, as well as applicable taxes and fees
that are due once the property has been purchased. Depending upon where you live
(and where the property is located), you can usually expect to pay between 3%
and 6% in closing costs. Keep in mind, though, that certain areas have higher
closing costs than others, and some lenders offer a no-closing-cost option on
real estate loans (wherein the closing costs are usually absorbed into the
payments that you make for your mortgage.)