There are all types of fees associated with purchasing a home. It can be daunting process not understanding how to make heads or tails with all the of monies needed for a successful close.
The Down Payment
The down payment is the percentage requirement of money that the lender needs for you to pay out of pocket in order to get loan approval to close.
The typical conventional loan is 20% down. This shows the lender that you have invested cash equity into the property, and are willing to shoulder part of the risk, just as he takes the risk to lend the money to you.
This substantial down payment also helps you build equity faster in your home as the market appreciates.
This 20% down is the ideal scenario that will give you the best options for a great interest rate, and without having to pay a “penalty insurance” called private mortgage insurance (PMI).
There are several options for those who do not have the traditional 20% to put down at closing. But all options will have private mortgage insurance attached to your loan as an additional fee. Taking on PMI will increase your monthly obligation.
In order to have this removed in the future, you will have to obtain another appraisal from the lender where the valuation of the home shows that you have reached the 20% threshold for the equity.
See: Should I Buy a $0 down Home
Closing costs are fees associated with obtaining the loan.
The main one will be the loan origination fee expressed in points or a percentage, that you have to pay the loan company who is originating your loan. The loan company uses these fees to pay the loan officer, the staff to underwrite your loan package, fund your loan, and other administrative fees.
In short, it is the upfront cost to cover and process your loan application from top to bottom.
Then there are other fees such as application fees, credit check fees, title insurance fees, appraisal fees, transfer fees, mortgage insurance, escrow fee, and prorated property taxes and HOA fees.
You can safely estimate a 3%-5% cost on the total purchase price of the home to cover this. For a $300,000 home, plan on $9,000 to $15,000 in additional monies on top of your 20% down.
It is possible to wrap this into the mortgage, but it is to your best interest if you pay this outright. This way you won’t be taking on more debt in the purchase of your home and avoid paying interest on this additional debt.
If you choose to finance the upfront closing costs, your lender may raise your interest rate. And, this may add up to a significant monthly mortgage obligation on a 30-year loan.
If it is in a down market, you can ask the seller to pick some of your closing costs. This will not work in a strong seller’s market. This is known as a seller concession.
You can also look into some down payment buyer’s assistance programs for some financial relief.
In the end, if you pay the closing costs upfront, this will be your best long term money saving option.