What costs come with taking out a mortgage?

You pay for mortgage and homeownership fees either up-front when you first take out the mortgage, or over time by paying them with your monthly mortgage payments. When choosing a mortgage, it’s important to consider both possibilities. A mortgage with a lower monthly payment may be the result of paying more costs at or before closing, or a mortgage may have a higher monthly payment because the principal amount of the loan is higher.

Upfront costs. In addition to your down payment, there are several different kinds of costs you must pay at closing.

• Origination and lender charges. These costs are charged by the lender for “originating,” or making you the loan. They are part of the price of borrowing money. Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc. Although the lender may itemize these costs differently, it’s the total amount that matters.
• Points. Points are a charge you pay upfront to the lender to lower the interest rate on your loan. Points are part of the price of borrowing money and are calculated as a percentage of the loan amount. You can choose whether or not to pay points. Learn more about points.
• Third-party closing costs. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance. You can shop separately for some of these services.
• Government fees. These fees may be required by your local government and charged in connection with the real estate transaction or mortgage. They generally will not vary based on who the lender is.
• Prepaid expenses and deposits. These expenses may be associated with your loan or with homeownership. Typically, you need to pay the interest on your loan between the time you close and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.
• Other homebuying expenses. These expenses may be associated with the purchase of a home but not required to get a mortgage. These may include home inspections, owners title insurance, or real estate agent fees.

Monthly costs. Your monthly payment will typically contain up to four elements:

• Principal. This is the money you borrowed and have to pay back. This is part of the cost of buying your home, but not a cost of borrowing money.
• Interest. This is the primary, but not the only, cost of borrowing money.
• Mortgage insurance. This is an additional cost of borrowing money, typically required for borrowers who make a down payment of less than 20%.
• Property taxes and homeowners’ insurance. These are costs of homeownership, not of borrowing money. They are usually bundled with your monthly payment and managed by the lender through an escrow account.

In addition, you may pay for condominium or homeowner’s association dues. These costs are usually paid separately from your monthly payment.

Learn more about these monthly costs.

Note, while property taxes and homeowners’ insurance are often paid with your mortgage, they’re really costs of homeownership. You would have to pay them with or without a mortgage. These costs are important in deciding how much you can afford. However, lenders don’t control these costs, so you shouldn’t make decisions about which lender to choose based on their estimates of these costs.

Learn more about loan costs.