The real estate market is booming across the country. Prices have risen in most areas but low mortgage rates are helping Central PA residents afford their first homes. According to Genworth Mortgage Insurance, last year 2.38 million Americans became first-time homebuyers. That’s a fourteen percent surge from the prior year. With so many of your friends and co-workers investing in new homes, you may be wondering if buying a home is the right choice for your family.
One way to decide if it’s the right time to buy a home is to ask yourself, “How much mortgage can I afford?” It’s best to determine a realistic understanding of how much home you can afford before you start browsing local real estate listings. Your approval for a home loan is determined by your current financial situation and creditworthiness. At Muncy Bank, we can help you understand the mortgage lending process and answer your questions about mortgage loans.
What is a Mortgage?
A mortgage is a loan that, combined with your down payment, pays for the purchase of a house. A typical down payment on a home is 20 percent of the purchase price. If you are planning to buy a $250,000 home, ideally you would provide $50,000 towards the purchase. The bank would then loan you the remaining $200,000. If you can’t provide a 20 percent down payment, there are specialty loans and private mortgage insurance that may be able to help.
A mortgage loan is secured by the home, meaning the lender can assume possession of the house if you fail to make your monthly loan payments. Interest rates on mortgages can be fixed or adjustable. A fixed-rate mortgage features consistent monthly payments that do not change over the life of the loan. An adjustable-rate mortgage (ARM), on the other hand, offers an introductory interest rate that will change over the years depending on the national benchmark rate. The interest payments on an ARM can increase or decrease over the years, so the borrower must be prepared to adapt to changing monthly house payments.
How is my Monthly Payment Calculated?
Your monthly mortgage payments will include a combination of principal, interest, and possibly mortgage insurance payments. If you’re wondering how to calculate a mortgage payment, start by exploring Muncy Bank’s online mortgage payment calculator. Online calculators should be used to provide an estimated payment and used to give you an idea of how much mortgage you can afford.
Loan Principal and Interest: The amount the bank provides towards your new home is known as the loan principal. Your monthly bill will include payments towards the principal plus interest on the amount you still owe on the loan. In a fixed-rate mortgage, your monthly payments will remain the same for the life of the loan, and the distribution between principal and interest will change. Early in the mortgage, you will be paying more in interest and less towards the principal. Over time, your remaining principal will diminish and you will pay less in interest.
Mortgage Insurance: If you didn’t provide a 20 percent down payment at closing, your loan will contain private mortgage insurance (PMI). PMI is an additional fee you pay monthly to account for the extra risk the bank has assumed in granting your loan. You can expect to pay between 0.2 percent and 2 percent of your mortgage principal in PMI.
Homeowners Insurance: You’ll likely be required to take out homeowner’s insurance on your new home. While the insurance company you choose is up to you, these payments are typically bundled into your monthly mortgage payment.
Property Taxes: Property tax rates vary by location so ask your lender or real estate agent how much you can expect to pay on your new home. New homeowners are often required to prepay property taxes throughout the year as part of their monthly mortgage payment. The money you pay is placed in an escrow account and held until your property taxes are due at the beginning of the year.
What’s included in Mortgage Closing Costs?
A set of one-time fees associated with your home loan make up your mortgage closing costs. Average closing costs for homebuyers range between 2 and 5 percent of the loan amount. The most cost-effective way to pay these fees is as a one-time expense at closing. In order to do that, you’ll need to have extra money set aside in savings. Closing costs on a $200,000 loan can run between $4,000 - $10,000. If you can’t pay this expense at closing, you may have the option to roll it into your mortgage. This will increase the principal of your loan and cost you more in interest down the road. Some common line items you’ll see in your closing costs include:
- Appraisal fee
- Home inspection fee
- Loan fees: application fee, attorney fees, prepaid interest
- Underwriting fee
- Title fees/insurance
- Property tax prepayment
Understanding What Mortgage You Can Afford
If you’re trying to decide how much mortgage you can qualify for, try our online financial calculator. If you don’t qualify for the amount you were hoping for, it’s time to reset your home search criteria or put off home buying for a few more years while you focus on your finances. Read more about how to build a budget and save money.
Don’t forget that your mortgage payment is only one part of your monthly home expenses. You’ll still have household utilities, upkeep, repairs, and everyday expenses to budget for once you're in your new home. Financial experts recommend limiting the amount you spend on your mortgage, taxes, and homeowner’s insurance to no more than 30 percent of your monthly income.
Get Expert Advice from a Mortgage Lender
Applying for your first mortgage shouldn’t be intimidating. At Muncy Bank, our friendly team of mortgage lenders is here to walk you through every step of the home buying process in Lycoming, Northumberland, or Clinton County. Contact us today with any questions you may have and to start the mortgage loan process. We look forward to discussing your mortgage needs at one of our convenient locations in Muncy, Clarkstown, Hughesville, Dewart, Montoursville, Montgomery, Linden, or Avis.