Final answer:
A processing fee of 1% to 2% for a new mortgage application is true and known as an origination fee. Down payments lower than 20% often result in extra costs like mortgage insurance. Understanding down payments and interest rates is key to comprehending the full cost of a mortgage.
Step-by-step explanation:
The statement that a small charge, roughly 1% to 2% of the loan amount, is assessed as a fee for processing a new mortgage application is true. This charge is commonly known as an origination fee and covers the lender's administrative costs. In the context of purchasing a home, a down payment is typically required, and the standard has been a 20% down payment. However, there are mortgage options available that allow for lower down payments, ranging from 0% to 3.5%, which are often accompanied by mortgage insurance. Mortgage insurance protects the lender in case the borrower defaults on the loan, but it also increases the total cost of the loan over time.
Understanding down payment dynamics is crucial when opting for a mortgage. For instance, if someone purchases a house for $200,000, a 20% down payment would be $40,000, meaning the mortgage amount would be $160,000. In contrast, with a lower down payment, the borrower might also pay mortgage insurance, adding to the overall cost.
In addition to down payments, the interest rate on a mortgage loan also significantly impacts the cost of borrowing. For example, an adjustable-rate mortgage (ARM) might start with a low introductory rate that later increases, thereby raising the payment amount.