April 25, 2019

Budgeting for Your Journey: Part II

You found your dream home and secured your mortgage with a 10% down payment – becoming a homeowner is just around the bend! Now is when the rubber meets the road, finalizing your loan and preparing for your monthly mortgage payments.

In reviewing your Loan Estimate, you'll see costs and terms that you may – or may not – have realized were part of your loan. Don't worry, your trusty co-pilots factored these in when calculating how much you can afford. 

So, what are some of these additional items and why are they important?

  • Escrow Payments: If your lender set up an escrow account for your mortgage, each month you'll also make an escrow payment to cover your property taxes and homeowners insurance. Your lender will deposit this amount into your escrow account and will pay for both these items on your behalf when they're due.

    Escrow accounts give you peace of mind that your taxes and insurance will be paid in full and on time. Regularly scheduled monthly escrow payments are also a good option because they eliminate the surprise of large annual or semi–annual payments when property taxes or insurance premiums are due.

  • Private Mortgage Insurance: Because you made a down payment of less than 20%, private mortgage insurance (PMI) will be part of your monthly mortgage payment. The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score. Generally, you can expect to pay between $30 and $70 per month for every $100,000 borrowed.

    PMI is important because it enables homebuyers who may be unable to afford a 20% down payment to buy a home and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.

You don't necessarily have to pay escrow or PMI for the life of your loan. You may have the option to cancel your escrow payments to your lender once you have built up at least 20% equity in your home and are current on your payments. If you decide to go this route, just remember that you'll be responsible for paying your taxes and insurance in full and on time. Likewise, if you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home.

Want to know more about the homebuying process? Be sure to follow our spring homebuying series.

Next Stop...Mortgage Types