When the loan closes (this is done simultaneously with the closing of the new purchase), there are other amounts you must pay. The biggest is the down payment or the difference between the loan amount and the price of the home. Think of that as an investment, not a loan cost. The down payment establishes your equity in the home at the time you take ownership. If all goes well, you will recover this, with some profit, when you sell in the future.

If the loan requires payment of discount points, these are due at the closing. Each point costs 1 % of the amount of the loan. This money goes to the lender to increase the income from making the loan. No one knows for sure why mortgage loans are priced this way (instead of just using an interest rate with no discount). It is traditional, and virtually all mortgage lenders charge points. One or more discount points may be considered “loan origination fees?’ The effect of these fees is the same as discount points. However, they are often separated out, and the terminology determines the income tax implications. Discount points for a purchase loan may be deducted on your tax return as mortgage interest, whereas origination fees are not tax deductible. When getting quotes on current loan terms, recognize that when points are reported as “2 plus 1” or “2/1,” that means three points, one of which is a loan origination fee.

Other expenses at closing involve services that the lender requires. A survey indicates the exact size and boundaries of the lot and verifies that there are no encroachments by adjoining properties. A title insurance policy is required to protect against legal claims against the property. A hazard and liability insurance policy must be purchased and maintained on the home. If there is mortgage insurance, a premium may be due at closing or added to the monthly payment, or both. Many private mortgage insurance companies offer a variety of ways of paying the Mortgage Insurance Premium (MW). Most borrowers opt for a monthly payment with no premium at closing. For EHA loans, there is a premium due at closing (1.75% to 2.25% at the time of publication) and an additional monthly MIP for loans over 90% of value. You can fold the upfront MW into the loan and pay it off monthly.

Most lenders require you to maintain an escrow account. The purpose of this account is to pay property taxes and hazard insurance premiums as they come due each year. The amount needed annually is estimated and divided equally by 12 months. The total monthly payment is often referred to as “PITI” principal, interest, taxes, and insurance. While these expenses would be incurred even if you did not use financing, maintenance of an escrow account denies you use of the money during the year. The assessments are made before the expenses are due, and only rarely is any interest paid on the actual escrow accumulation.

Total payments on the loan are not the same as total costs. A 30-year loan may require twice the amount in payments as a 15-year loan, but the true cost in today’s dollars may be the same, depending on the rate of inflation over the terms of the loans.