This Mortgage Expense Could Bust Your Budget More So Than a High Interest Rate

It's an expense you must prepare for when buying a home.

Signing a mortgage loan is a more expensive prospect today than it was a year ago. That's because today's mortgage rates are considerably higher. In fact, a lot of new homeowners may find that they wind up in over their heads financially due to higher mortgage rates.

But there's another expense that might bust your budget if you're buying a home today. And it's one you'll need to consider carefully before finalizing a home purchase.

Don't let closing costs catch you off guard

When you sign a mortgage, you're forced to pay a series of fees known as closing costs to finalize that loan. Usually, those fees will amount to 2% to 5% of the loan amount you're taking on. So for a $200,000 mortgage, you could be looking at anywhere from $4,000 to $10,000 in closing costs, which is clearly a pretty wide range.

To give you a better sense of what those fees might look like, a recent research study by The Ascent found that the average closing costs in the U.S. are $6,905, including prepaid property taxes that new home buyers often have to cover. Without accounting for prepaid property taxes, the average closing costs on a mortgage are $3,860.

But the amount you'll have to pay in closing costs will hinge on what your specific lender charges. And while some of those fees may be negotiable, others may not be. Loan origination fees, for example, are fees you can sometimes try to talk a lender down on. But recording fees to enter your mortgage into public record are set by your municipality, not your lender, so those won't give you much wiggle room.

Now you should know that most lenders will allow you to roll your closing costs into your mortgage. That way, you can pay them off over time.

But remember, today's mortgage rates are expensive. So if you roll your closing costs into your mortgage, they're going to cost you a lot more money when you account for paying interest on them.

That's why paying those costs outright may be a better bet. But if you're going to do that, be prepared to bring that pile of cash to your closing.

Avoid surprises

Whether you're planning to roll your closing costs into your mortgage or pay them upfront, it's important to know what number you're looking at. Your lender is required to disclose your closing costs so you're not thrown for a loop. So commit that number to memory and plan on having to part with that much money one way or another.

One thing you don't want to do, however, is raid your emergency fund to pay your closing costs. If you can't afford them upfront, you're better off rolling them into your loan than leaving yourself short on cash to cover unplanned bills. And while today's higher mortgage rates make rolling closing costs into a loan less appealing, in the grand scheme of your actual mortgage, those added fees might actually be quite negligible.