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Buying a house and signing on the dotted line for a 30-year mortgage is intimidating.

Interest rates can result in paying up to three times the value of your home by the time you own it free and clear. What’s worse is additional fees add up to tens of thousands of dollars on top of principal and interest.

Banks and mortgage brokers make many of these costs next-to-invisible to you. But if you know what to look for, they can be easy to avoid. You won’t be able to get rid of every fee, but you can do your best to avoid these common hidden costs.

Breaking It Down

Below, we’ll show the average total expense associated with each cost. Here’s how we arrived at our numbers.

  1. We started with the average home price in September 2019, which was $362,700, according to U.S. Census Bureau statistics. We rounded it to $360,000 for the sake of simplicity.
  2. We used the average interest rate on a 30-year fixed mortgage, which was 3.91% in September 2019.
  3. We looked up the average price of each hidden cost in September 2019.
  4. We applied the information from steps one and two to get a total cost for the course of the loan and its context within the size of the loan.

5 Hidden Mortgage Costs

1. Those Mysterious “Points”

What They Are: You’ve heard the term, but do you know what “points” are and what they mean to the cost of your mortgage?

There are two different kinds of points. Discount points are money you spend upfront beyond the down payment. You are essentially prepaying interest to reduce the interest rate on your mortgage. This is a complicated financial decision. Consult your mortgage broker to determine if it is the best choice for you.

Origination points are fees your lender charges to cover the cost of processing your loan. A “point” is approximately 1% of the loan. These are fees in addition to the price of your house and the most common cost you’ll encounter.

What They Cost: A single point on an average loan increases your expense by $3,600. There’s not a reliable average for the number of points you can expect because it varies wildly from lender to lender. But one to four points is a reasonable range. That means you can expect to pay roughly $3,600 to $14,400, plus interest, during your loan.

What to Do About Them: Negotiate to reduce the points. Most lenders can offer fewer points if you ask. If they won’t budge, pay the points up front rather than rolling them into your loan. During the length of your mortgage, even a single point will accumulate $2,520 in interest.

You can also negotiate for the seller to pay closing costs, which is a major cost savings.

2. Property Taxes

What They Are: One or more government agencies will charge you a certain amount of money to own property. They use that money to fund services like the fire department and schools.

In most cases, your property taxes will be added to your monthly mortgage payment, and your lender will keep the taxes current. This increases the monthly mortgage payment beyond the purchase price.

What They Cost: In 2019, the average property tax rate was 0.6%, or $2,279 per year, according to WalletHub. Assuming no increases in tax rate or the assessed value of your home over a 30-year mortgage, that’s a total of $68,370. Property tax rates vary widely in the United States, from 0.27% in Hawaii up to 2.44% in New Jersey. You can look up state’s your rate on WalletHub or with your local property tax bureau.

What to Do About Them: You can’t do anything to avoid or reduce taxes on a property at the time you purchase it. However, you can do two things to mitigate their impact.

First, you can control the flow of the cost by paying the taxes yourself, upfront and in advance. This does nothing to reduce the taxes, but it does slash your monthly payment and keeps more money in your hands going forward.

Second, anything you can do to prevent your local authority from increasing the assessed value of your home will keep your tax rate lower. You can learn more about calculating and appealing your assessed value here.

3. Homeowners Insurance

What It Is: If you own your house free and clear, and your house burns down, nobody loses money but you. If you have a mortgage or home equity line of credit when it burns, your lender has lost their collateral, and it’s likely they’ll lose the loan. That’s why your lender requires you to carry homeowner’s insurance.

Like property taxes, in most cases, your monthly homeowners insurance payment is added to your mortgage payment each month, increasing your monthly mortgage.

What It Costs: The average cost of homeowner’s insurance varies from state to state, but the national average is an annual premium of $1,192. That’s about $100 added to your monthly payment and $35,760 over the life of a 30-year mortgage.

What to Do About It: First, never let your homeowners policy lapse. If this happens, your lender has the legal right to buy homeowners insurance for you at a punitively high rate. Second, shop around for your homeowner’s insurance to get the best possible rate. If you have auto or life insurance in place, see about multi-line discounts to reduce this cost.

4. Mortgage Insurance

What It Is: Mortgage insurance is not there to protect you. It’s there to protect your lender if you default on your loan. If that happens, they get paid the difference between how much they can recoup from a foreclosure sale and how much they can get out of you.

Nobody volunteers to pay mortgage insurance. If you have a high-risk loan because of low credit or insufficient personal income statements, the lender might require this insurance. It’s also a common requirement of any loan where you borrow more than 80% of the home’s value.

What It Costs: Mortgage insurance typically costs between 0.5% and 1% of the home’s value. That’s an average of $1,800 to $3,600 a year in premium payments. Over the course of the loan, that’s $54,000 to $108,000 — 1/3 the value of the home.

In most cases, the mortgage insurance premiums will be added to your monthly payments just like your homeowners’ insurance and property taxes.

What to Do About It: Avoid paying for mortgage insurance at all costs. If you have poor credit, work to improve it before you even consider purchasing a house. Get your proof of income squared away and make enough of a down payment to keep the value of the loan below 80%. You might need to hold off on purchasing a house for another year, but it’s worth it.

5. Miscellaneous Fees

What They Are: Beyond the fees above, lenders — especially unscrupulous ones — will tack on a wide variety of extra charges, most of which they hide by rolling them into the loan and mentioning in fine print somewhere in the paperwork. Such fees include but are not limited to:

  • Application fees
  • Assumption fees
  • Appraisal fees
  • Attorney’s fees
  • Broker’s fees
  • Prepaid interest
  • Title search fees
  • Mortgage broker fees
  • FHA, VA, or USDA fees
  • Upfront payment of taxes, mortgage insurance, and HOA fees
  • “Junk” fees (which are literally made-up fees to make the loan more profitable for lenders)

What They Cost: The accumulated costs of all these fees vary widely, but they can add up to several thousand dollars. After interest, they can cost you five figures over the three decades of your loan.

What to Do About Them: Ask for a complete list of fees and charges in your first conversation with a potential broker or lender. Ask questions to make sure you understand each fee, and negotiate every item on the list. If a potential lender refuses to provide a list, walk away.

Upon closing, compare the fees charged against the list you received and insist any new fees or higher fees be explained or removed.

Final Thoughts

As we said earlier, you won’t be able to eliminate all of these costs and fees. The mortgage game is set up to be profitable for lenders and brokers. But that doesn’t mean you shouldn’t try. Even a small reduction can save you thousands of dollars over the life of your loan.

The best strategy is to be informed and ready for the extra expenses. At best, you can reduce the lifetime cost of your home by more than your annual salary. At worst, you’ll know what the house will actually cost you, and you can make your budget and financial plan accordingly.

 

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Daniel Lowe

Daniel Lowe used to be a finance lender in North Carolina for more than two decades. Now, he provides consulting to banks.

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