1. The price of the loan
A low-rate mortgage will save you money, but the act of getting one will cost you.
When you close on any home loan, you're required to pay a long list of fees and taxes, covering an appraisal of the property, title insurance, the loan settlement and a lot more.
These closing costs typically total 2% to 5% of the loan amount. The average is $5,749 including taxes or $3,339 without them, according to a survey released in April 2020 by ClosingCorp.
If you don't have the cash to pay closing costs upfront, you have options. You can roll them into your loan, though that means you'll be paying interest on them. Or, you might ask your lender pick up some of the charges, if you're willing to accept a higher interest rate as part of the bargain.
Or, you could borrow the money using a short-term personal loan. Personal loans are available from online lenders with repayment terms of up to seven years and interest as low as 4.99% APR.
2. Protection for your family
Let's be honest: No one enjoys talking about life insurance. But it's essential for homeowners because if a breadwinner dies, a policy can pay off the mortgage — and give the surviving family members financial peace of mind.
A 2019 survey from the nonprofits LIMRA and Life Happens found that fewer than 6 in 10 Americans have life insurance. If you're buying a home you need life insurance, and the same goes if you're refinancing and don't already have it.
A good policy for a homeowner is term life insurance — good for a limited number of years — with a term matching the mortgage term. Most term life policies have level premiums that never change, are easy to buy online and are remarkably cheap.
How cheap? A 30-year-old with a 30-year mortgage could get a 30-year, $1 million term life insurance policy for under $2 a day.
That would probably pay off the mortgage and put the kids through college.
3. A large enough down payment
When you buy a home, your lender will want you to make a down payment: an upfront cash investment in the house. (Hold on, refinancers — we'll get to you shortly.)
A National Association of Realtors survey found the median down payment in 2019 was 12% of a home's purchase price, but you can pay as little as 3% down.
But note that if you put less than 20% down, you'll likely be required to carry private mortgage insurance (PMI) to protect the lender in case you default. It's likewise if you're refinancing and your ownership stake in the house is under 20% of its value.
PMI is annoying and can be expensive, tacking $135 onto the monthly mortgage payment of the average-priced home, according to The Mortgage Reports.
Homebuyers can avoid PMI by building up a down payment fund. You might save up using an account that pays not only good interest but also up to 10% cash back on purchases.
4. Protection for the home itself
This one might seem like a no-brainer, which is why we left it for last. But a home is a big investment, probably the biggest purchase you'll ever make, so you want to make sure to safeguard it with home insurance.
A mortgage lender will require you to have homeowners insurance, which provides financial protection in case the house and its contents are lost in a fire or other disaster (except floods or earthquakes, which require special policies).
Most homeowners are good about keeping their property insured: 95% have home insurance, according to a poll from the trade group the Insurance Information Institute.
But don't be underinsured. Make sure you have enough coverage to replace your home and its contents (if needed) and provide you with adequate liability protection if someone is hurt on your property.
And, don't pay too much. One way to save is by bundling your home insurance with your car insurance. If your auto insurance company doesn't offer car and homeowners insurance together — at a discount — maybe it's time to shop around for a new insurer.