Homeownership is a journey full of wild emotions. One day you find yourself exhausted with all the paperwork and agent appointments and another time you’re all fussy and excited about the prospect of moving. It’s a lot to take, but there are plenty of reasons to be looking forward to a bright future, no matter how scary it might get.
The costs, for example. You of all people should know that it takes way more than a dime to just get an application started.
Why? You need to save for a down payment. And there are all those fees that lenders charge you for loan underwriting. All these are to be expected. If you’re financially prepared, you should have no problem cruising down to the closing table. However, if you’re cash-strapped and don’t really have that much saved in the first place, it’s not the end of the road. There are various payment paths you can take. Whichever you prefer will not alienate you from the potential of finally owning a place of your own.
But first, what exactly are the costs we’re talking about?
Closing costs make for a significant part of the cost of home buying. That is, if you’re using financing to purchase a home.
Aside from the down payment which buyers usually pay to a range of 3 to 20 percent of the total price of the home, the costs of closing can sum up to 2 to 5 percent of the overall amount of the loan.
These costs include property taxes, title insurance, escrow costs, origination fees, as well as fees paid to the local government for recording the deed, etc. The overall amount can widely vary as some costs are determined by factors influenced by statutory or regional laws.
A combination of lender fees and third party expenses all tally to arrive at a final number. Typically, an estimate of the closing cost is provided to you by your lender within the first few days of your application so you will have an idea of how much you should bring to the closing table. A final closing disclosure is given days before the final closing date.
What are my payment options?
Once you receive your initial closing cost estimate, you should have a pretty good picture of how much your budget will be. This should be able to help you strategize how to go about paying for said costs. Here are your options.
a. Pay the costs upfront
The biggest takeaway from paying your costs upfront is that you retain a low interest rate (all other things remaining equal). That means lower monthly payments and faster equity building. This payment option is available for all types of mortgages.
b. Roll the cost into the loan
Unfortunately, this is only possible for borrowers applying for FHA loans and USDA loans but not VA loans.
If you ever decide to take this path, you need to prepare some additional funds to settle. This will increase your loan amount and your monthly mortgage payments.
c. Have the lender pay for the costs of closing
Available to all FHA and VA loan borrowers, having the lender pay for the necessary closing costs in what is commonly called a zero cost closing will cost you an increase in your interest rate which means you’ll have bigger mortgage payments every month.
The financial responsibility that comes with buying a home can put a lot of pressure on homebuyers. Still, however you decide to structure your budget largely depends on your priorities, on how much you have saved, and on your future plans and expectations. All these factors must be taken into account in crafting a strategy that will result into better overall savings.
Speak with your financial advisor or your agent about your current finances and collaboratively deduce the best path to take when it comes to your closing payments.Click to See the Latest Mortgage Rates»