Note: Be careful when using mortgage calculators on other websites.

Many of these mortgage calculators do not include these related amounts which means it can seem like you can afford more than you ultimately will qualify for and because of this you could end up wasting time and even falling in love with a place that is beyond your reach.

Instead Use Mitch's calculator 'How Much Will My Monthly Payment Be' to get a realistic view of what your total monthly obligation will be.

Or, you can check out all the 20 Mortgage Related Calculators Here.

The Principle & Interest Portion Of Your Monthly Mortgage Payment

Many people get confused about their monthly mortgage payments and how they are calculated?

It helps to understand that a loan is “amortized,” which means you will be paying it off over time, usually with monthly payments. The payments you make are set up to pay both interest and principal. When you have a fixed-rate mortgage, your payments stay the same over the life of the loan.

The meaning of “amortize” and “mortgage” both come from the Latin word “mort,” which means death. When you amortize your loan, you are basically killing off the debt. This is different from a loan that goes on indefinitely. A mortgage has a set term, and a length of time you are given to pay the loan off completely.

The formula for calculating the payment is not simple. The easiest way to estimate your payments is to use a mortgage calculator when you can enter several variables.

Understanding the interest calculation of your loan... Let’s look at an example loan amount yo explain this portion.

For a loan of $100,000, with a fixed interest rate of 4% for a period of 30 years, your monthly payment will be about $477. Most of this will go toward the interest in the early part of the loan. So, for example in your first $477 payment, $333 of the total would go towards interest and the remaining $144 will pay down the loan's balance.

This will make more sense if we look more at this example. With a $100,000 loan amount and a 4%, your interest rate that equals $4000/year in interest.  $4000 / 12 months = $333 which was the interest for the first month. After your 1^st payment the balance of your loan has been decreased by $144 which leaves a new balance of $99,856. Because the remaining balance is lower the amount of interest is also less and the balance of your payment that goes to pay off your loan is correspondingly greater. In fact, at the end of the first year you will owe $98,239 which means you would have only paid off $ 1,761 of the principal of your loan.

For many buyers, they are shocked to realize that they have paid almost 6,000 in mortgage payments yet paid off less than $2000 of their loan's balance. However, it does make sense because the lender needs to continue to get the interest on the loan's balance owed while also helping you to pay down the loan, in this example, over 30 years. With each year of payments, since your payment amount stays fixed, more and more of the payment will go to paying off the loan principal and less will be used to cover the interest. Again, this happens because with each passing payment, there is a little less remaining on the loan so there is less interest to pay. Again, since the interest payment decreases over time, and your payment amount remains constant, that means that with each subsequent payment you are paying off more of the principal then you did the prior month. After around 13 years of making payments this split between principal and interest will be almost equal, with about $235 going to interest and 242 going towards paying off the loan. Each year after that, a greater portion of your payment will go towards paying principal vs. interest.

If you have an interest only loan, then while your payment would stay at only $333, because the loan balance itself would never be decreased. Most lenders though will not allow this to continue for too many years. Usually, the lender will limit interest only payments to only five to 10 years. Then, once that 5 -10 years ends, typically your payments will increase so that you can pay off your loan over the next 30 years.

When you refinance a loan, you start over. Your 30-year term begins again, and you start again at year one, paying mostly interest with each payment.

With both a new mortgage and a refinance, typically your first mortgage payment will be due on the 1st day of the month, that immediately follows the month AFTER you closed. This happens because the interest is paid in arrears (after the fact) and it must accrue. So, if you close on the 25^th of April, typically your first payment would be June 1st which is the first of the month that follows the first compete month of May. In this example, at closing on the 25th, you will typically pay as part of your closing costs, the daily or prorated interest for the last 5 days of April which in this example would be April 25th to the 30th. You are prepaying this interest at closing since these days are not be covered by your first payment on June 1st that only pays the accrued interest only for the month of May.

Home Insurance

Unlike mortgage interest that is paid in arrears, (due at the end of a month,) Hazard or Homeowners insurance is paid in advance of the time being covered or service being provided. Lenders require this insurance to make sure that the property, which is collateral for the loan, is covered in case of a disaster like a fire or storm damage etc. You will typically pay for the first year of insurance as part of the closing or the lender will require you to provide a copy of the paid invoice showing you have already paid for a policy that covers the first year of the loan. Typically, lenders will also require you to “escrow,” (set aside) money into a separate "forced interest free savings account" with the lender. Lenders create this escrow account at closing and will typically include as part of your closing costs 2-3 months of for property homeowner insurance.

Then with your first mortgage payment, and every payment thereafter, the lender will collect from your total mortgage payment 1/12 of the annual insurance premium. This means that when the next insurance payment is due in a year after you bought the place, that the lender should already have the funds to pay for the insurance on your behalf and you do not get hit with a large payment at the end of this year.

If your down payment is 20% or more, then the lenders believe that you also have substantial risk in the property, and they may allow you to directly pay the premiums when they come due vs requiring you to escrow money for the lender to pay when these payments are due.

PMI/MIP... Private Mortgage Insurance & Mortgage Insurance Premium 

Private mortgage insurance (PMI), is typically required by a lender if your insured conventional loan-to-value ratio, the amount of the loan divided by the value of the home, is greater than 80%. Said another way this is typically required when your down payment is less than 20% of the purchase price. Note that this is calculated using the purchase price not the appraised value. So, even if the home should happen to appraise for more than you are paying, and the difference would seem to say you will have 20% or more equity in the property, you will still have to pay for PMI.

Mortgage Insurance Premium (MIP) is just like PMI but is required with FHA loans. With MIP and PMI this insurance protects the lender, not you as the homeowner, in case you default on the loan. Both PMI and MIP typically include an initial lump sum amount paid at closing along with monthly payment premiums that become a portion of your total mortgage payment. Most lenders have programs that allow you to increase the size of your loan to include your upfront MIP or PMI fees to minimize your closing costs.

Certain lenders with coventional loans also have PMI that can be paid ONLY in one lump sum at closing. The amount of payment will vary based on the size of the loan and your credit history, but the typical breakeven point is 2-3 years. This means that the amount you pay at closing as a 1-time amount is roughly equal to the combination of the smaller upfront payment at closing plus only 24-36 of your monthly PMI payments. The advantage to this is approach is that while your closing costs are greater you end up paying PMI for only 24-36 months vs the entire life of your mortgage.

With PMI you can typically remove this additional expense once the loan balance is equal to or greater than 80% of the value of the property. Conversely, with MIP the only way to discontinue MIP before the end of the mortgage term, is to refinance or sell your home.

Real Estate Property Taxes

Like mortgage interest, that is due at the end of a month, Indiana Real Estate Taxes are paid in following year and cover the taxes due in the prior year. Indiana requires two tax payments each year with one bill being paid in the spring and the other in the fall. The payment due in the spring covers the taxes due for the 1^st half of the prior year and the fall payment covers the taxes due for the 2^nd half of the prior year.

You will typically receive a credit (money) at closing for the property taxes for when the seller owned the property. Depending on when the next tax payment is due, relative to when you plan to close, the lender may require part of these funds, that would typically be given to you at closing by the seller, be paid directly to the taxing authority. Note: While these amounts paid to buyers by Seller’s will typically reduce the amount of money you need to bring to closing, the lender will need to know that you have enough funds to cover all of your closing costs WITHOUT including these credits or funds from the seller.

In the same way lenders want to pay for property insurance they also typically require that they pay the taxes on the property to help ensure the lender’s interest in the property is protected and the property is not sold to another owner at a tax sale due to unpaid back taxes. To deal with these twice per year payments in Indiana most lenders will require you to “escrow,” (set aside) money into a separate account with the lender to pay the real estate taxes when they come due.

Lenders will create this escrow account at closing and will typically include as part of your closing costs at least 2-3 months for property taxes. If the next tax payment due date is very close the lender could require 6-7 months of tax payment escrow at closing. One monthly payment is equal to 1/12 of the anticipated annual Real Estate taxes. Then with your first mortgage payment, and every payment thereafter, they will require you to pay another 1/12 of the annual insurance premium. That way, when the next insurance payment is due, the lender already has the funds in your escrow account to pay for the insurance on your behalf and you do not get hit with a large payment at the end of each year.

If you pay more than 20% down, then many lenders believe that you as the buyer also have a substantial risk in the property and they will allow you to pay the real estate taxes when they come due vs requiring you to escrow for this payment.

Home inspections are an evaluation of a home’s condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property you plan to buy. The cost for home inspections is mainly based on the size of the home. While a typical inspection will run around $350-$400 inspections overall can range from $285 to $1000. The inspector will:

• • • Evaluate the physical condition: the structure, construction, and mechanical systems.
    • Identify items that should be repaired or replaced.
    • Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure, and finishes.

Having a home inspection completed could be the best money you will ever spend. You should have a home inspection done even with new construction. In Fact. it is probably a good idea to have inspections completed during construction stage if you are having the home built.

Radon Testing is done to ensure that the radon levels in the home are at or below accepted EPA levels. Although you cannot see, smell, or taste radon when you breathe air containing radon, per the EPA, you increase your risk of getting lung cancer. In fact, the Surgeon General of the United States has warned that radon is the second leading cause of lung cancer in the United States today. Plus, if you smoke and your home has high radon levels, your risk of lung cancer is especially high. The EPA recommends testing for Radon up to the 3rd floor in properties, including in high rise condominiums.

The cost for the testing itself ranges from $100-$150 and is typically paid for at the time of testing. Mitch also normally asks Sellers to pay for Radon mitigation which can cost an additional $800-$3000. However, just like purchase price the buyer’s willingness to mitigate radon is subject to negotiation.

Mitch always makes sure if radon is an issue and the seller is unwilling or unable to mitigate that you as a buyer can walk away with your earnest money if you do not want to mitigate at your own expense.

Termite Inspections are done to ensure that there is not active termite populations or substantial past termite damage that could result in a major expense to repair.

WHAT IS A HOME WARRANTY

Many Buyers believe that Sellers delay maintenance when they know they will be selling a home. Since home buyers hope to minimize the financial impact after closing related to malfunctions with the components in their new home most will ask the Seller to pay for a home warranty. First time home buyers with no experience maintaining a home may consider having a home warranty a critical piece of their offer on a property.

Home Warranty plans provide for specific types of coverage, be sure to fully evaluate the coverage in each policy before selecting a plan.

• • • If a home system or appliance breaks or stops working, the homeowner calls the home warranty company.
    • The home warranty company calls a provider with which it has a business arrangement.
    • The specific provider calls the homeowner to make an appointment.
    • The provider fixes the problem. If an appliance is malfunctioning and cannot be repaired, depending on contract coverage, the home warranty company will pay to replace and install the appliance.
    • The homeowner pays a small deductible usually $75- $100.

Home warranty plans will run $350 - $600 with most plans costing $400 to $500. Most Buyers will ask for the Seller to pay for the plan but like many things, this is 100% negotiable. If the Seller feels they are selling the home for less than they expected they will generally try to exclude this expense.

What Is Homeowner's Insurance

While lenders will require that you arrange for homeowner's insurance coverage (sometimes called hazard insurance) when there is a mortgage involved it is strongly suggested even with cash sales.

This insurance protects against physical damage to the home by the fire, wind, vandalism, and other causes, and ensures that your, and any lender's investment, in the property will be secured even if the house is destroyed.

If you are buying a condominium, a portion of the hazard insurance may be part of your monthly condominium fee. But you should still secure insurance coverage for the portion of the Condo not covered by the association along with covering your home furnishings and valuables. Most lenders want to see you carry coverage on at least 20% of the purchase price. But keep in mind that with condos you, as the owner, need to typically insure from the drywall on the ceiling down, from the flooring up, and from the drywall in from the studs. This means your insurance policy should cover all wall coverings, flooring, lighting, appliances, bathroom finishes along with typically ALL windows and doors and limited common areas like any balcony, patios, or decks, etc.

Flood Insurance is required by lenders in federally designated flood areas. While not required in cash sales this coverage is still strongly encouraged. This insurance compensates you for physical property damage resulting from flooding.

What Is Title Insurance?

Most lenders require a title insurance policy to protect the lender against an error in the results of the title search. If a problem arises, the insurance covers the lender's investment in the mortgage. Unlike health, car, or home insurance that insure against what may happen in the future, title insurance is insuring the buyer and a buyer's lender against what has already happened in the past.

There are typically two title insurance policies. Both are one-time premiums are usually based on the purchase price. One is typically provided at an expense to the seller showing that the seller can sell the home without any issues like the seller did not previously loose the property to litigation, a real estate tax sale, foreclosure a divorce etc. The second policy, which is the less expensive cost, is for the benefit of the lender who is extending a new mortgage to a buyer. Because the buyer chooses to have a mortgage, versus paying cash for the property, this 2nd policy is typically paid for by the buyer.

The Seller's policy, as the more expensive of the polices, will typically run $300-$1500 and is mostly based on the sales price of the property.

A closing protection letter (sometimes “insured closing letter” or “CPL”) forms a contract between a title insurance underwriter and a lender, in which the underwriter agrees to protect the lender for actual losses caused by certain kinds of misconduct by the closing agent. Examples would be a failure to follow written closing instructions or fraud or dishonesty in handling the lender’s funds or documents. The typical cost for the CPL is $25-$50. There are usually two "letters" (one for the lender & one for the buyer) and again because the buyer chooses to have a mortgage, versus paying cash for the property, this fee is typically paid for by the buyer.

What is an Appraisal & The Appraisal Fee?

An appraisal fee, of typically $300-$500, pays for an independent determination, by a licensed appraiser, of the value of the property and land you want to purchase or refinance.

While lenders want to be sure that the purchased property is worth at least as much as the loan amount you as the buyer wants to make sure you are not overpaying for a property which is why you should have this done even with cash purchases. Appraisals are not an exact science! They are just one person's opinion of the value of the property at one specific moment in time. When there will be a mortgage loan, the Appraiser is selected by the Buyer's lender. The more atypical a property is, or the more unaware an Appraiser is of exact local marketplace for this property being purchased, means it is exceptionally critical to work with lenders who have access to a small number of experienced appraisers who deal with small segments of the market vs just taking the next appraiser that is available even though they may not have much experience in the specific location or market, or the type of property being purchased.

All of Mitch's purchase agreements give you, as the buyer, the ability to get your earnest money back, and walk away from a sale, if the property does not appraise for at least as much as you have agreed to pay for the property. Typically, but not always, if everyone agrees the Appraiser was qualified, and there are not issues with either the comparable sales that were used or the adjustments that were made to set the value, then most sellers will offer to lower the purchase price to match the appraisal to try to keep a deal together. However, should a property not appraise, both parties can unilaterally walk away from a sale with the buyer getting their earnest money 100% returned. In the same way a Buyer cannot be forced to pay more than the appraisal, the seller cannot be forced to sell the property for less than the agreed upon sales price.

Some lenders and brokers include the appraisal fee as part of the application fee; you can ask the lender for a copy of the appraisal.

What Fees And/or Commission Will You Pay Your Buyer's Agent

While each agent based on their Broker's Commission Policy, can determine the fees, they will charge to represent both sellers and buyers, meaning that brokerage fees are 100% negotiable, locally in the Greater Indianapolis market “Full Service” real estate agents seem to charge around 3.5% to represent buyers on properties priced below $300,000 and around 3% for places priced above $300,000. As the price of the home increases though the percentage charged typically decreases. Also some brokers charge a lower percentage or even a flat fee but also typically provide a lower level of expertise and service. Historically though the sales price of a property has included commission for both the seller's agent and the buyer's agent. Also, historically the total commission being paid by the seller has been shared equally between the Listing Agent and the Buyer's Agent.   

However, the National Association of REALTORS®, along with many states, including Indiana effective July 1, 2024, now require that before agents can show buyers any property, the potential buyer must already be under contract with the agent who is showing the buyers a property. This contract must include a predictable and fixed amount of compensation that the agent will receive for representing this buyer in the purchase of a property. The only time a buyer can be shown a property, and not already under contract with the showing agent, is when the agent is representing ONLY the sellers, like during an open house.

So, if the Buyer's Agent Agreement stipulates a minimum percentage of the purchase price that is higher than the seller is paying as buyer’s agent commission (BAC) then you, as the Buyer, would be obligated to cover and difference as part of your closing costs between the agreement and what the seller is paying.

• READ 10 QUESTIONS/ANSWERS REGARDING AGENT COMMISSIONS,
  Two Recent Changes Including the new law requiring Buyer Agent Agreements, & More on Dual/Limited Agency And Home Warranties

Most Top Performing Buyer's Agents, like Mitch, will tell you at the time of any offer, if the BAC is lower than then any Buyers Agent Agreement stipulates. This way you know what amount if any you will be responsible for as part of your closing costs BEFORE you write an offer on the property.

Many Brokerages charge a Transaction or Commission related to Document Management for the purchase. This fee ranges from $75.00 to $200. With Mitch, there is no transaction fee.

What Are Government Recording Fees

Recording is the act of putting a document into official county records, especially for real estate and property transactions, that provides a traceable chain of title. Specifically this would typically include the fees to record the mortgage and/or deed with the country where the property is located. These charges will typically only run $80 -$100.

What Are Surveyor & Surveying Fees

A survey confirms the location of buildings and improvements like fences, decks, walks, storage sheds, swimming pools etc., on the lot or land you are purchasing. Surveys can include more precise staked corners of the land/lot or simply may include a survey location report which is less accurate and only provides a visual representation of the lot with the improvements within a 2'-3' margin of error

While most Lenders do not typically require a property survey, there are many times that it is still strongly recommended to have a survey done even unless the property is a Condominium. Some lenders will require a complete (and more costly) staked survey to ensure that the house and other structures are legally where the seller says they are to make sure none of the new owner's improvements fall on a neighbor’s land. Typically, the most that would be required by a lender would be the less costly Surveyor Location Report that can run $175-$300. This document is usually sufficient to confirm that all structures, fences, etc. are indeed within the property lines.

A staked Survey typically runs from $250 to $800. The larger the property, and/or if you want the lot corners to have stake markers placed will push these fees towards the higher end of the range and possibly even higher. If you know you plan to add a fence, or build more structures, then it probably makes sense to have a staked survey completed to avoid paying twice for these costs when the time comes to do the actual work.

If you are buying a condominium in a high rise it probably does not make sense to spend money on a survey unless the lender requires it which is very unlikely.

What Are Homeowner Association Transfer & Move-In Fees... "HOA Fees"

Many Homeowner Associations (HOA) have fees associated with setting up buyers in their systems and/or removing the sellers. This Transfer fee typically ranges from $100 to $300 and in resale transactions, vs brand new construction, this fee is typically paid for upfront by the seller and then the seller is reimbursed at closing so that ultimately both sides equally share in this expense.

Some HOAs also have $200-$300 "Move-In" fees. These fees are especially common with Highrise condominium developments where the fee is intended to help cover wear and tear on common areas. A version of these fees also happens frequently with new home construction where the 1st, 2nd and/or 3rd owners must pay an amount equal to $300-$500 or as much as 1/2 of the annual HOA fees, that would be paid by the buyer as part of closing. With new construction this is to help fund the starting HOA reserves as a new development. It may apply only to the very first buyer, or it could apply to the first 2-3 buyers including resale transactions. Rarely, though it can apply to ever sale of the property. This would only change if after the developer is 100% done with the development, the assocation voted to change the HOA docs to eliminate this reccuring transfer fee.

What Are The Closing Or Settlement Fees

In many states’ closings are handled by lawyers who charge several thousand dollars for this service. In other states like Indiana, closings are typically conducted by title insurance companies who charge generally $300-$400 for this service.

Typically all parties involved in the sale–the buyer; the seller; any lender; the real estate agents; and representatives from the title firm- meet to sign forms and transfer funds. While this Closing Fee is negotiated as part of every purchase agreement the usual and customary result is the fee is typically shared equally between buyer and seller.

What Are The typical Bulder Fees With New Construction

The Settlement or Closing Fee

In Indiana, closings are typically conducted by title insurance companies who charge generally $300-$400 for this service.

While this Closing Fee with resales of existing homes is negotiated as part of every purchase agreement, the usual and customary with builders is that this fee is typically paid 100% by the buyer. So instead of this fee being $150-$200, this will typically cost buyers $300-$400.

The Seller's Title Insurance Policy

While this one-time insurance premium is usually based on the purchase price, and is typically provided at an expense to the seller, with new construction the buyer typically pays for all title insurance policies. This means if the buyer will have a mortgage, then with new construction, the Buyer will pay for two title insurance policies. The builder's perspective is that the buyer chooses to have title insurance and/or a mortgage, so the Buyer should pay for all of these costs.

The Seller's policy, as the more expensive of the polices, can run form $300-$3000, again mostly based on the sales price of the property. These fees on the closing statement, will typically be broken down into several smaller amounts labeled as the Processing Fee, a Search and Exam fee, a Title Premium, Recording Fees ect./p>

Similarly a closing protection letter (sometimes “insured closing letter” or “CPL”) forms a contract between a title insurance underwriter and a Seller, Buyer, and a lender if there is a mortgage, in which the underwriter agrees to protect the lender for actual losses caused by certain kinds of misconduct by the closing agent. Examples would be a failure to follow written closing instructions or fraud or dishonesty in handling the lender’s funds or documents. The typical cost for the CPL is only $25-$50 an in Indiana is required by law if there is a title firm involved. There are usually two "letters" (one for the lender & one for the buyer) however again with new construction, the fees for all closing protection letters are paid for by the buyer since the buyer chooses to have title insurance.

The Home Owner Assocation Transfer/Initial Funding Fee

With most new construction, where the neighborhood is also new, the buyers will pay an amount equal to $300-$500 or as much as 1/2 of the annual HOA fees. This would be paid by the buyer as part of closing. With new construction this is to help fund the starting HOA reserves as a new development. This fee at closing may apply only to the very first buyer, or it could apply to the first 2-3 buyers including in resale transactions. Rarely, though it can apply to every sale of the property. This collection down the road would only change, if after the developer is 100% done with the development, the assocation voted to change the HOA docs to eliminate this reccuring transfer fee.

The Builder Fee

With new construction most builders will charge a Builder Fee. While the builders may tell you it's what they charge for acting as general contractor and/or construction manager to construct the homes, and to supervise and coordinate the work, it hard to explain why that would not already be built in to the price of your new home! Unfortunately, it's just another cost associatated with buying new construction. This fee could be $500.00 to $600.00 or could be as much as 1% of the sales price of the house, meaning that it could be several thousand dollars.

What Is The Application Fee

An Application fee is imposed by your lender or broker and can range from $65-$650 and typically covers the initial costs of processing your loan request and checking your credit report. While this is a very typical cost the substantial range in these typically nonrefundable fees means you should be clear on how much this fee is and what it includes when comparing various lending options.

What Are Assumption Fees

If a buyer assumes a mortgage, then the buyer "takes-over" the existing mortgage including the existing and often lower than current interest rates. Buyers can see significant savings at closing since there is no need for a new appraisal because the mortgage is already in place and the current mortgage is just transferred from the seller to the new buyer. The only mortgage types that typically allow for a new buyer to assume an existing mortgage are FHA, VA and USDA and these entities also impose limits on assumption-related fees to keep these mortgages more affordable for the new buyer.

An assumption Fee is the amount paid to a lender (usually by the buyer) for the lender’s agreement to start collecting payment from the new buyer instead of the original borrower (seller). This is an uncommon expense, and these are not typical in most sales.

What are Escrow or Reserve Funds

If your mortgage loan is for 80% or more of the purchase price, then most lenders will require that you set aside money in an escrow (or reserve) account that is basically a forced interest free savings account that is used to pay for property taxes, homeowner’s insurance, and flood insurance (if applicable).

Lenders use escrow funds to ensure that these items/expenses are paid on time and to protect their interest in your home. With an escrow account, money is held by the lender or its agent, which then pays the taxes and insurance bills when they are due.

Funding of these escrow accounts happen as part of your monthly payment that includes 1/12 of your annual insurance and real estate taxes. Plus, at closing/settlement, you may need to provide initial funding for this account. How much you will need to deposit into the escrow account at closing will depend on when the first payout will occur, and the government also limits the amount that can be in this account at any time.

For example, if you buy your home in January and property taxes are due in May, then there will only be 2-3 monthly mortgage/escrow payments before the lender will pay 1/2 (6/12ths) of your annual real estate tax payments. In this example you would likely need to deposit at closing 2-3 months of Homeowners Insurance and 3-4 Months of Property Taxes. If closing is within a month or two of the next real estate tax payment, then it is possible although unlikely that the tax escrow could be as much as 6-7 months of real estate taxes.

NOTE: ALSO SEE SELLER REAL ESTATE TAX CREDITS

What Are FHA, VA or RHS Fees

The Federal Housing Administration (FHA) offers insured mortgages, and the Veterans Administration (VA) and the Rural Housing Service (RHS) offer mortgage guarantees. If you are getting a mortgage insured by the FHA or guaranteed by the VA or the RHS, you will have to pay FHA mortgage insurance premiums (MIP) or VA or RHS guarantee fees.

An important difference between MIP and PMI is the length of time buyers are required to pay the premium. If you buy a house with an FHA loan, you will be required to pay MIP for at least 11 years. If you make a down payment of less than 10%, you will need to pay MIP throughout the life of the loan. The cost of MIP depends on the term of the buyer's mortgage, the amount of the buyer's base loan amount, and the loan to value ratio (LTV). While the cost of the annual premium can vary from borrower to borrower, the annual cost of MIP generally runs between 0.45% and 1.05% of the loan amount.

Another important difference between FHA and conventional loans is every buyer with an FHA loan pay monthly insurance premiums and must pay an upfront premium/fee which is currently 1.75% of the home’s purchase price. That means on a house that costs $250,000 FHA buyers, unlike buyers with conventional mortgages, will pay a mortgage insurance premium/fee of $4,375.

VA guarantee fees range from 1.25% to 3.3% of the loan amount, depending on the size of your down payment (the higher your down payment, the lower the fee percentage). RHS fees are 2.00% of the loan amount.

What Is The Origination Fee

The origination fee (also called an underwriting fee, administrative fee, or processing fee) is charged by the lender for evaluating and preparing your mortgage loan. This fee may also cover the lender’s attorney’s fees, document preparation costs, notary fees, and similar charges.

Average loan origination fees range from 1% to 6%, and some could go as high as 8%. They amount of this fee takes into consideration your credit scores and the duration of the loan. A typical mortgage loan origination fee ranges from . 5% - 1% of the loan. Buyers will ultimately pay this fee either with additional cash at closing or through a higher interest rate or larger mortgage loan amount that also includes this fee.

What Are Private Mortgage Insurance Premiums (PMI)

If your down payment (the difference between the sales price of the property and the amount of any mortgage loan) is less than 20% of the purchase price or the appraised value if the appraised value is less than the purchase price of the property, then the lender will usually require mortgage insurance. The insurance policy covers the lender’s losses if you do not make the loan payments.

The most common PMI gets paid monthly along with each month’s mortgage payment. In the past, if mortgage payments are current and there is a good payment history, PMI could be canceled at a buyer's written request when the buyer reached 20% equity in their home (based on the original purchase price.) While this is still true for insured conventional loans recent changes mandate that MIP, which is like PMI, payments on FHA loans now will never end on many if not most FHA loans. When you have monthly MIP on an FHA loan the only way to eliminate it could be to refinance or completely sell the covered property.

Alternately to monthly PMI many buyers have an option that involves an upfront lump sum payment vs paying monthly PMI. This might be a great option if you have the additional dollars for the closing costs because the break-even point for upfront PMI can be as low as two three years. This means the amount of upfront PMI is roughly equivalent to 24 monthly PMI payments. There is also a lender-paid PMI option that is built into a slightly higher interest rate. With this option though, like an FHA loan, the higher interest rate will apply to the life of the loan.

What Is A Power Of Attorney Fee (POA)

A Power of Attorney (POA) is a legal document authorizing one person to act on another’s behalf. A Power Of Attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.

In the case of a Real Estate purchase or sale related POA this document typically gives another individual the ability to sign on behalf of a buyer or seller at closing for the purchase or sale of a property. The Title company completing the closing usually must prepare the POA and this can cost $75 – $150.

It can take a several days to prepare the POA and once it is prepared the person giving the ability for another to sign on their behalf will have to sign the POA in the presence of a notary public and return the POA to the title firm before closing. For these reasons you should let your agent know a party to the transaction will not be at closing and will require a POA. The title company will need to know which party will not be at closing and their current zip code along with the name of who will be signing in place of the absent party.

What is Prepaid Interest

Your first regular mortgage payment is usually due about six to eight weeks after you close (for example, if you close in August, your first regular payment will be due on October 1; the first payment in October includes the interest for the month of September). However, as soon as you close you will start to have interest costs. So, prepaid Interest is the amount you owe from the date you close till the 1st full month after you close.

For example, if you close on August 16, you will owe interest for 16 days starting on August 16 through and including the 31st. This Amount of Interest is considered prepaid since it gets paid at closing and in this example pre-pays interest from August 16th through the 31st.

What Is A Rate Lock

A Rate Lock is a commitment by the lender to a borrower guaranteeing a specified interest rate for a specified period to allow for a delayed closing which can often happen with brand new construction and the home will not be ready to close within 30-45 days.

Rate Locks are typically for 30-45 days. Many lenders will charge a fee to extend a Rate Lock beyond the initial or typical timeframe.

What Are Points

Points are a one-time charge that may be negotiated with the lender, usually to reduce the interest rate you pay over the life of the buyer's loan.

One-point equals 1% of the loan amount. For example, one point on a $200,000 loan would be $2,000.

In some cases–especially in refinancing– the points can be financed by adding them to the amount that you borrow. However, if you pay the points at closing, they are deductible on your income taxes in the year they are paid (Note: Different deduction rules may apply when you refinance or purchase a second home).

What Is A Buydown

A buydown gives a borrower a temporarily reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller (on behalf of the buyer), the lender, or by the borrower themself to lower the interest rate for a short period of time.

A permanent buydown, known as Points, is paid the same way but reduces the interest rate over the entire life of a home loan. Buydowns do not happen very often unless you are working with some new home construction and semi-custom or production builders in a buyer's market.

What Is A Seller's Tax Credit

In Indiana Real Estate taxes are billed 2 x per year. 1/2 of the year is billed in the spring and the 2nd payment is billed and due in the fall. However, the taxes are billed one year behind. So, taxes paid during the current year are covering the prior year.

Typically most Sellers will pay taxes on the property for when they owned it. So, this means that sellers will almost always owe taxes that oftentimes might not even be due to the taxing authority yet at closing of the sale. In some instances, the lender may require these taxes be paid at closing to the state. At other times, since there will be enough time to escrow or build up the amount that will be due before it is due, and the lender will allow these taxes to be given to the buyer in the form of a Credit against what the buyer would otherwise bring to closing.

Note: While the buyer may be given this credit at closing the buyer must qualify for the loan without using this credit. Generally, the amount of this credit, on homes being resold, will be either be just over or just under a full year’s worth of real estate taxes.

On new construction, because there was not a home to tax in the prior year, there typically is no substantial real estate credit.

What is Seller's Assistance

Lenders will typically allow the seller to pay up to 3% of the Sales price as Buyer’s Closing costs and pre-paids. The amount of allowed seller's assistance though changes based on the type of property and mortgage, and the amount of downpayment that the Buyer is using. See the chart below to see how that allowable amount can change.

Doing this means that the purchase price is increased by the amount of the Seller Assistance which means these amounts are then included in an increased mortgage amount.

While including Seller assistance may help you be able to afford the home you want, because we are adding up to 3%  or more to the net purchase price, we must be able to buy the home at the ‘right price’ so that the extra 3%+ does not push the cost of the home with seller assistance beyond the ultimate appraised value. If the property requires an apprasail, and then does not appraise for any reason including the Seller's Assistance, then the more likely the deal could die.

Home inspections are an evaluation of a home’s condition by a trained expert typically paid for by the buyer once the property is under contract. Some Seller's will have a pre-listing inspection done for one of two main reasons:

1. One reason is to be able to identify and address defects before the home is shown to buyers.
2. The other reason is be able to identify and disclose defects to buyers before the home is placed under contract.

Mitch always encourages sellers to include in the projection of seller's proceeds from the sale some amount for repairs although the amount is only a placeholder and not an amount that can be reasonably predicted. It's hard to predict how much potential repairs will cost without have a pre-listing inspection done. This is especially true if it's been over 5 years since the home was last inspected. This is another benefit of having a pre-listing inspection done, although if you have an inspection done and don't plan to address repairs before listing then the seller must disclose any defects found to exist. This disclosure though is more good than bad, especially if a seller is unwilling and/or unable to make any repairs.

During the home inspection, a qualified inspector takes an in-depth and impartial look at the property. The inspector will:

• • • Evaluate the physical condition: the structure, construction, and mechanical systems.
    • Identify items that should be repaired or replaced.
    • Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure, and finishes.

In usual and customary real estate markets virtually every buyer will have a home inspection done to identify any defects. Under Indiana law, a "Defect" means a condition that would have a significant adverse effect on the value of the Property, OR that would significantly impair the health or safety of future occupants of the property, OR that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises.

So while the buyer's will pay for the inspections themselves, you as the seller typically will need to repair/address all defects the buyer requests as part of an inspection response before closing at the your own expense as the seller.

Buyers typically test for Radon to ensure that the radon levels in the home are at or below accepted EPA levels. Although it's not possible to see, smell, or taste radon when you breathe air containing radon, per the EPA, you increase your risk of getting lung cancer. In fact, the Surgeon General of the United States has warned that radon is the second leading cause of lung cancer in the United States today. Plus, if you smoke and your home has high radon levels, your risk of lung cancer is especially high. The EPA recommends testing for Radon up to the 3rd floor in properties, including in high rise condominiums. Radon mitigation is one of the most widely requested items in Buyer's Inspection responses. Radon mitigation can cost an $800-$3000. 

Similarly Termite Inspections are done to ensure that there is not active termite populations or substantial past termite damage that could result in a major expense to repair. 

While repairs, just like the sales price are a negotiable item, as a Seller if you are unwilling or unable to address/repair all DEFECTS before closing then the buyer is entitled to terminate the purchase agreement AND get the return of all of the buyer's earnest money! Additionally, any defects must be disclosed to subsequent buyers if they are not repaired by the seller before the property is placed under contact again.

WHAT IS A HOME WARRANTY

Many Buyers know and believe that Sellers delay maintenance when they anticipate that they will be selling their home soon. Since home buyers hope to minimize the financial impact after closing related to malfunctions with the components in their new home most will ask the Seller to pay for a home warranty. First time home buyers with no experience maintaining a home may consider having a home warranty a critical piece of their offer on a property.

Home Warranty plans provide for specific types of coverage, be sure to fully evaluate the coverage in each policy before selecting a plan.

• • • If a home system or appliance breaks or stops working, the homeowner calls the home warranty company.
    • The home warranty company calls a provider with which it has a business arrangement.
    • The specific provider calls the homeowner to make an appointment.
    • The provider fixes the problem. If an appliance is malfunctioning and cannot be repaired, depending on contract coverage, the home warranty company will pay to replace and install the appliance.
    • The homeowner pays a small deductible usually $75- $100.

Home warranty plans will run $350 - $600 with most plans costing $450 to $550. Except for in extremely aggressive Seller's markets, most Buyers will ask for the Seller to pay for the plan. Still, like most things, this is 100% negotiable.

If the Many seller feel if they are selling the home for less than they expected they will generally try to exclude this expense. However, the benefit for Sellers to offer a home warranty are noteworthy too since the many firms also offer the exact same coverage for the seller for little or no extra dollars during the time the property is for sale. This means if before closing the AC, Furnace, Water Heater or even appliance dies the Sellers cost to replace/repair the item is typically limited to the $100.00 deductible! Additionally, if defects with mechanicals or appliances surface as part of an inspection then most times the home warranty can also be used to address these items.

Mitch strongly encourages Sellers to include a home warranty for these and other equally compelling reasons.

What Is Seller's Title Insurance?

Unlike health, car, or home insurance that insure against what may happen in the future, title insurance is insuring the buyer and a buyer's lender against what has already happened in the past. Specifically title insurance makes sure the seller's have the legal ability to sell the property. That the property hasn't already been sold to someone else or that that ownership has not changed away from the seller due to divorce, litigation, foreclosure, real estate tax sales, gifting of the property etc.

Since most buyers have lenders and most lenders require a title insurance policy to protect the lender against an error in the results of the title search this is an extremely common expense. If a problem arises after the closing, the insurance covers the lender's investment in the mortgage. 

There are typically two title insurance policies. Both are one-time premiums are usually based on the purchase price. One is typically provided at an expense to the seller showing that the seller can sell the home without any issues like mentioned above. The second policy, which is the less expensive cost, is for the benefit of the lender who is extending a new mortgage to a buyer. Because the buyer chooses to have a mortgage, versus paying cash for the property, this 2nd policy is typically paid for by the buyer.

The Seller's policy, as the more expensive of the polices, will typically run $300-$1500 and is mostly based on the sales price of the property.

A closing protection letter (sometimes “insured closing letter” or “CPL”) forms a contract between a title insurance underwriter and a lender, in which the underwriter agrees to protect the lender for actual losses caused by certain kinds of misconduct by the closing agent. Examples would be a failure to follow written closing instructions or fraud or dishonesty in handling the lender’s funds or documents. The typical cost for the CPL is $25-$50. There are usually three "letters" (one for the seller, one for the buyer's lender & one for the buyer.) As A Seller, you would typically pay only the one $25-$50 fee and again because the buyer chooses to have a mortgage, versus paying cash for the property, the buyer would pay for their buyer's lender and the buyer's own CPL fees. 

Property Taxes

Real estate property taxes are typically calculated as a percentage of the property's total assessed value based on both the value of the land and any improvements including the structure(s) that are in place. This is determined by a local tax assessor. These taxes are assessed on virtual all real estate (excluding government owned land and many properties owned by Federal Exempt Nonprofit organizations) This tax is paid to state and local governments. The funds generated from real estate taxes (or real property taxes) are typically used to help pay for local and state services.

In Indiana real estate taxes are paid in two payments each year. The 1st half of the taxes are paid based on an invoice from the taxing authority that's due May 10th. The 2nd payment covering the 2nd half of the year is due November 10th. However, real estate taxes in Indiana are paid one year in arrears. This means the May invoice is actually paying the first half of the PRIOR year and the November invoice is paying  taxes due the 2nd half of the year. Said another way an Invoice that's due on 5/10/21 is actually paying the real estate taxes for the first half of 2020.

Typically most purchase agreements  require the Sellers to pay the real estate taxes on the property for when the Seller actually owned the land even though the taxes are not due to the taxing authority yet. So, this means that sellers will almost always owe taxes at closing that often times might not even have been billed by the taxing authority yet.  In some instances the Buyer’s lender may require these taxes be paid at closing to the city while at other times, since there will be enough time for the Buyer to escrow or build up the amount that will be due, the lender will allow these taxes to be given to the buyer in the form of a Credit against what the buyer would otherwise bring to closing.

As a general rule the amount of this expense at closing, on homes being resold vs new construction, will be either just over or just under one full year’s worth of real estate taxes. The exception to this would happen if the seller's either don't have a mortgage in place or aren't escrowing the tax payment through a lender. This means the sellers pay real estate taxes directly via either though one or two payments to the taxing authority. If the seller's pay the taxes though one payment then typically the only real estate taxes paid by the seller at closing will be a proration of the annual real estate tax bill prorated from January 1st through the day of closing.

This means If the seller is paying taxes directly when due, and the closing happens on January 2, the seller's lowest expense at closing would be the real estate taxes for the prior year plus a credit to the buyer of  only 2/365 ths of the seller's annual tax bill that covers the real estate taxes owed for the current year although not due till May 10th of the following year. 

What Are Government Recording Fees

Recording is the act of putting a document into official county records, especially for real estate and property transactions, that provides a traceable chain of title. Specifically for Sellers, this would include the fees to release the mortgage and deed recorded in the seller’s name. This will generally run $80 -$100.