Mortgage Insurance Fees and Other Expenses To Prepare For When Investi
Buying a house is a big deal. That means more than a few costs are involved. Let’s take a brief look at 4 of the biggest costs.
Expense #1: Home Loan Interest
When we borrow money from the bank that money isn’t free. It comes with a cost and that cost usually takes the form of interest. Since most investors won’t be paying for the whole cost of a property upfront in cash equity, they will leverage the cost by financing. They will find a bank that will offer them a mortgage loan and that bank will charge them a compounding interest rate. The rate will depend on the loan. Usually loans are either a Fixed-rate Mortgage (FRM), or an Adjustable-rate Mortgage (ARM). An ARM may be preferable if the investor is planning on keeping the property for only a few years. Interest rates can vary substantially. At the date of the writing of this article, the national average for a 30-yr FRM is 3.52 percent.
Expense #2: Private Mortgage Insurance
Sometimes the bank may require additional insurance if they assess a loan to be high-risk. If this is the case they usually require private mortgage insurance (PMI). PMI is often required if a down-payment is less than 20 percent of the total cost of the property. This protects the lender in case the borrower defaults. Again these rates are variable and subject to a variety of factors, but they usually range from 0.32 percent to 1.20 percent of the principal loan balance per year.
Calculate PMI here.
Expense #3: Earnest Money + Down Payment
At the beginning of negotiations, a sum is often invested into a third-party account with a contingency period; the sum is called earnest money and the account is an escrow. This money demonstrates the seriousness of the potential buyer. The potential buyer then continues negotiations, and may administer an inspection, and seek financing. If they proceed with the purchase, then the earnest money is put towards the down-payment. If they rescind, then the money may be withdrawn; however, if the contingency period has ended, there may be a fee.
The down payment is of course the money paid upfront by the buyer. Oftentimes, this is 20 percent of the total cost of the property. The down payment can have a substantial effect on the interest rates and PMI.
Calculate how your down payment affects your rates, here.
Expense #4: Commission
Once the property is sold, the real estate brokerage will take a commission of the sell, and this will in turn be divided between the sales agent and buyer agent. This cost is usually factored into the price of the property already. A standard commission is between 5-7 percent, but can vary and is negotiable.
So don't forget to plan for...
Remember these four major costs when calculating your next investment.
- 1. Interest
- 2. PMI
- 3. Upfront Costs
- 4. Commission