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A freelance writer with more than three years of researching and writing about personal loans, insurance, credit cards, and more, Lindsay's work has appeared on sites such as Insurify, Bankrate, and The Simple Dollar.
Updated June 26, 2024 Fact checked by Fact checked by Betsy PetrickBetsy began her career in international finance and it has since grown into a comprehensive approach to journalism as she's been able to tap into that experience along with her time spent in academia and professional services.
The total cost of your mortgage will depend on your credit score, your down payment, and the price and location of the home you’re buying. It will also depend on your loan type, interest rate, and term, along with other factors. The average borrower with a 30-year, fixed-rate mortgage incurred about $182,000 in total mortgage and homeownership costs over the course of a seven-year ownership period, according to 2020 Fannie Mae data. But that amount can vary significantly from loan to loan.
When you take out a mortgage, you’ll need to pay various upfront and monthly costs in addition to repaying the amount you borrow. Also consider costs of homeownership, such as property taxes, homeowners insurance, and maintenance costs. Learn what factors affect your mortgage costs and how to calculate your mortgage cost based on your unique situation.
Most people can’t afford to buy a home in cash, so mortgages are often necessary—but they’re also costly. A mortgage is a type of loan designed to provide funding to purchase a property. The lender agrees to lend you funds, typically a portion of the home’s appraised value, with down payment requirements varying by loan type. In exchange, you make monthly payments with interest over a set period. A mortgage loan is secured by the property, which means the lender has the right to seize the home in foreclosure if you fail to make your payments.
Some mortgage loans, such as FHA loans, VA loans, and USDA loans, are backed by the federal government. These programs help to make homeownership more accessible to people with fair credit or those who can only afford a low down payment.
Most conventional loans are guaranteed by Fannie Mae and Freddie Mac. All mortgage loans are issued by private lenders—the government does not directly lend money to homebuyers.
Below is a breakdown of the upfront fees you can expect when taking out a mortgage from a typical mortgage lender. These costs are often collectively referred to as closing costs. Average closing costs vary by state, ranging from 0.7% to 5.4% of the purchase price in 2021, according to data from CoreLogic. The average homebuyer paid $6,905 to close on a single-family home in 2021.
Lenders are required to inform you of all costs in a closing disclosure at least three business days before your closing date. Note that some closing costs are negotiable, and the seller may agree to pay some of the costs as part of your contract. Here are the charges you can generally expect.
Mortgage lenders charge various fees to cover the cost of issuing the loan. These upfront costs are separate from your mortgage interest rate. Lenders may itemize the costs in different ways, but the important figure is the total. Typically, lender fees range from between 1% and 2% of the loan amount. The charges may include:
Certain services are required as part of the mortgage process, and the buyer is required to pay for them. These closing services or “settlement services” will be listed in your loan estimate. Examples of third-party costs include appraisal fees, home inspection fees, and title insurance. You’ll also need to pay attorney fees if an attorney is required at closing in your state. For some services, you can shop around for the most affordable service provider.
The Consumer Financial Protection Bureau (CFPB) is seeking public comment in an investigation of rising closing fees charged by mortgage lenders and associated third-party service providers. If you have experienced any disreputable practices or have any information for the CFPB, submit a comment here using docket number CFPB-2024-0021.
Points, or discount points, are optional upfront payments to the lender that reduce your interest rate for the life of the loan. Each point costs 1% of the loan amount, but the interest rate reduction varies.
Be sure to calculate the interest savings before purchasing points. For example, if the extra cash could earn more in a savings account than it would save you on interest, or if it will take you many years to recoup the upfront cost in savings and you plan to sell the home before then, you should decline the points offered by your mortgage lender.
Your local government may charge fees for processing the documents related to your mortgage and recording your deed. Fees vary by municipality, but you can expect to pay between $20 and $250.
Most states charge a real estate transaction tax. How that tax is calculated depends on where you’re buying a home. You may also be required to prepay your property taxes on the home for a period of time, as discussed below.
Lenders want to ensure that you’ll be able to afford various homeownership costs during the first year of homeownership, so they often require you to open an escrow account with an initial deposit due at closing. The money in the account is typically put toward homeowners insurance, property taxes, and mortgage interest for the first year.
If you take out an FHA loan, you’ll need to pay an upfront mortgage insurance premium. Loans backed by the VA don’t require mortgage insurance, but they do require a VA funding fee ranging from 1.25% to 3.3% of the loan amount, depending on your down payment and other factors. Other costs may be required, depending on the loan type. If you put less than 20% down on a conventional loan, you’ll be required to pay private mortgage insurance—typically, you pay these premiums monthly, but you may have the option to pay upfront.
A settlement agreement with the National Association of Realtors requires that, starting in July 2024, buyers include their agent’s fees in a written agreement. While the impact on buyers remains uncertain, it is likely that sellers will continue to pay buyers' agents’ commission out of the sale price, according to the Urban Institute. However, it’s in your best interest to negotiate a low rate or flat fee with your agent to make your purchase offer more appealing.
Mortgage lenders charge interest with each monthly payment according to an amortization schedule, whether you have a fixed-rate or variable-rate mortgage. At the beginning of the loan term, more of your payment goes toward mortgage interest rather than principal, so you build equity more slowly at first. Over time, more of your mortgage payment goes toward paying down the principal, which is the amount you borrowed.
When inflation is high, the Federal Reserve adjusts the federal funds rate to make it more expensive for businesses to borrow money. The goal is to slow down economic activity to keep inflation in check. When the federal funds rate is high, lenders charge higher interest rates on mortgages.
If you take out a fixed-rate mortgage, the interest rate stays the same over the life of the loan, and even a 0.5 percentage point increase in the mortgage rate can cost you thousands of dollars over the life of the loan. You can use this calculator to estimate how different mortgage rates will impact your monthly payment and total borrowing cost. Other factors that impact your mortgage interest rate include:
Different lenders may also charge different rates to the same borrower, so shopping around is important. Freddie Mac estimates that homebuyers who get at least four rate quotes can save more than $1,200 per year just by choosing the best offer. If you get all your rate quotes within a two-week period, you’ll avoid unnecessary damage to your credit from multiple hard inquiries. Newer credit scoring models allow you 45 days to shop around, but some lenders still use old models.
Owning a home requires regular property tax payments to your local government. The amount you’ll be responsible for and the collection schedule vary by county.
Lenders require you to have an active homeowners insurance policy, which helps pay to repair your home after certain hazards, like fire or theft. Your lender may collect your homeowners insurance premiums as part of your monthly mortgage payment and hold the funds in an escrow account until the bill is due.
If you made a down payment of less than 20%, you may also be required to pay mortgage insurance, which protects the lender in case you default on your payments. You can stop paying private mortgage insurance on a conventional loan once you have enough equity, but FHA premiums can only be canceled by paying the mortgage balance in full before its maturity date.
Homeowners insurance doesn’t cover regular maintenance and wear and tear. While home maintenance isn’t a mortgage-related cost, it is a cost of homeownership that you need to consider when deciding between renting and buying a home. Replacing a large appliance or installing a new heating and cooling system can be very expensive. Most experts recommend setting aside 1% of your home’s value each year for repairs and maintenance costs.
| Loan Type | Conventional Loan | FHA Loan | USDA Loan | VA Loan |
|---|---|---|---|---|
| Cost | At least a 3% down payment + closing costs | At least a 3.5% down payment + closing costs + upfront mortgage insurance | 0% down payment + closing costs + 1% funding fee | 0% down payment + closing costs + 1.25% to 3.3% funding fee |
The National Association of Realtors reports that the typical monthly mortgage payment for a median-priced home with a 20% down payment was $2,093 based on preliminary data for March 2024. However, this monthly payment doesn’t reflect the full cost of obtaining a mortgage, and both monthly payments and upfront costs vary significantly based on a range of factors.
Mortgage costs depend on a number of individual factors. While average mortgage rates provide a good reference point, you may need to pay a higher rate if you have fair credit or are making a low down payment. Ultimately, a mortgage is a good choice if it is affordable and allows you to live in the home you want. It’s also important to compare offers from a handful of lenders to get the best deal.
The credit score you’ll need to qualify for a mortgage varies by mortgage type and other factors. For example, it’s possible to get an FHA loan with a 500 credit score if you make a 10% down payment, while conventional loans typically require a score of 620 or better. Bear in mind that lenders will also evaluate other aspects of your finances, such as your debt-to-income ratio.
The average American had a credit score of 715 in 2023, according to Experian. Most people in the U.S. have a credit score of 670 or better. The better your credit score, the more likely you will qualify for the best interest rates.
Before taking out a mortgage, understand the upfront and ongoing costs of homeownership. Buying a home can be a good investment, since home values often appreciate and your mortgage payments go toward building equity. But homeownership is more expensive than renting in many cities. You can reduce your borrowing costs by comparing mortgage rates, making a larger down payment, improving your credit, or choosing a conventional loan. Consider consulting with a professional financial advisor for more guidance on your specific situation.
