Saving For A Home Purchase
When youre saving up money to purchase a home, keep a few possible expenses on your radar. These include the down payment, closing costs, moving expenses, and your first couple of mortgage payments.
You dont have to be overwhelmed by all these expenses. There are ways to keep these costs lower:
- Down payment: This could be lower than you think depending on the type of home loan you choose. Your loan officer can show you the options that you qualify for so you can make the best decision for your financial goals.
- Moving expenses: You can significantly reduce these costs by cleaning, prepping, packing, and moving yourself, without any hired help. Friends and family may also be an option if theyre willing to lend a helping handor a truck!
- Mortgage payments: There wont be a monthly payment due during the first month of your mortgage. This gives you a little extra time to build up for your first payment.
Understanding the many facets of your mortgage loan is key before you sign your final documents. Closing costs and down payments should certainly be considered carefully.
There is a number called cash to close in the transaction, which combines all the closing costs and down payment money into one number. Be sure to take a look at that number and build it into your plan and ask about alternatives early in the process.
APM Loan Advisors are happy to help you decide which option will best fit your situation. Chat with us today!
How Much Are Closing Costs For The Buyer
Closing costs vary depending on where youâre buying your home, the home itself and the type of loan you choose. Here’s a list of some common fees you may need to pay when closing. While itâs not intended to be all-inclusive, this list reflects what is generally required of homebuyers.
- Appraisal fee: A valuation of the property should confirm the homeâs value aligns with the purchase price.
- Home inspection: The home inspection verifies the condition of the property. It can also uncover problems with the home that need attention before closing.
- Recording fee: Your local city or county government requires a recording fee to update public land ownership records.
- Transfer tax: When your local government updates your homeâs title and transfers it to you, youâll pay a transfer tax fee. This fee varies depending on where you live.
Taxes and insurance
- Homeowners insurance: A type of protection that compensates you if your home gets damaged. Often, lenders require this as a condition of your loan.
- Private Mortgage Insurance : Depending on the type of loan you choose and the amount of your down payment, you may have to pay PMI. PMI protects the lender against any loss if you fail to pay your mortgage.
- Property taxes: The buyer usually pays the city and county property taxes due from the date of closing through the end of the tax year at closing.
The Downsides Of Rolling Closing Costs Into Your Mortgage Refinance Loan
When you roll your closing costs into your mortgage refinance loan, you’ll have to pay interest on that money the entire time you’re paying off your home loan. This can actually make these fees more expensive.
Consider the difference between that $200,000 loan and the $206,000 loan mentioned above. If you took out a 30-year $200,000 loan at 3.25%, your monthly payment would be $870 and your total interest costs would be $113,428 over the life of the loan. But if you borrowed $206,000 because you tacked on closing costs, monthly payments would be $897 and you’d pay $116,831 in total interest over the life of the loan. Instead of paying $6,000 up front, you’d pay an extra $27 per month every month for three decades. That means you’d end up spending about $9,700 on closing costs and the interest paid on them.
Increasing the amount you borrow and your monthly payment could also make loan approval more difficult. That could be an especially big issue if you’re close to exceeding your lender’s allowable debt-to-income ratio or if you’re refinancing a loan with a balance close to 80% of your home’s current value.
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Can You Waive Closing Costs On A Home
Some closing costs must be paid, no matter what. But you can try to negotiate origination and application fees with your lender. You may even be able to get your lender to waive certain fees entirely.
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Typical Closing Costs For An Fha Loan
You can expect your FHA closing costs to be anywhere from 2%-4% of the loan amount. You will have standard fees that you cannot avoid and will need to be paid regardless as to which lender you choose. Some of these fees or closing costs include your credit report, home inspection or appraisal, the title search and title insurance, and flood certification just to name a few.
Next, you will have some lender based fees which may vary from lender to lender. These fees include discount points, origination fees, and possibly an underwriting fee.
Finally, you have unavoidable fees that are FHA specific such as the upfront mortgage insurance premium. Read our article about FHA mortgage insurance premiums for more information.
If you would like to see a detailed breakdown of all FHA closing costs that you may incur, then read our article on FHA closing costs.
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Cost Of Financing Mortgage Insurance
As unwelcome as upfront mortgage insurance might be, by any of its various names, it will also cost you more over time. Once you need mortgage insurance, youll be paying monthly premiums for at least two to five years, possibly longer per PMI rules. If you add this premium to your mortgage amount, youll pay interest on this money each month. For example, FHA requires that you keep its mortgage insurance for five years or until your loan-to-value ratio declines to 78 percent, whichever takes longer.
Is It Smart To Roll Closing Costs Into Home Loans
Whether or not rolling closing costs into a home loan is the right choice for you will depend largely on your personal circumstances. If you dont have the money to cover closing costs now, rolling them in may be a worthwhile option.
However, if you have the cash on hand, it may be better to pay the closing costs upfront. In most cases, paying closing costs upfront will result in paying less for the loan overall.
No matter which option you choose, you may want to do what you can to reduce closing costs, such as negotiating fees with lenders and trying to negotiate a concession with sellers in which they pay some or all of your costs. That said, a seller concession will be difficult to obtain if the housing market in your area is competitive.
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The Fees Roll Into Your Principal
This option takes your closing costs and rolls them into your principal balance. In other words, theyre added to the amount you borrowed from your lender and factored into your monthly payment. While this doesnt affect your interest rate, youll pay more interest over the life of your loan since this increases the overall amount borrowed.
Unless youre purchasing a home with an FHA, VA or USDA loan and building in certain fees, you can only choose to roll your closing costs into your principal with a refinance. Essentially, you would use your home equity to pay for the costs.
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Can I Roll In My Closing Costs When I Refinance
Yes. Rolling closing costs into your new loan is known as a no-cost refinance and may be a good strategy if your short-term priority is to keep more cash in your pocket. There are two key ways to bake upfront costs into your new loan:
The first is by taking lender credits. In exchange for a higher interest rate on your loan, your lender will give you credits to cover your upfront closing costs. The second is by applying your closing costs to the principal of your new loan amount. This means your interest payments will be calculated based on this higher number.
While each of these strategies can offer financial advantages, you are ultimately delaying payment on your closing costs rather than avoiding them altogether. Make sure you understand the overall impact before you decide to do a no-cost refinance.
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Rolling Closing Costs Into Fha And Va Loans
FHA and VA loans have some unique features and fees that require additional consideration when deciding if you want to roll your closing costs into the loan. You should discuss all features of the loan program with your lender to make sure you fully understand your obligations as a borrower.
FHA loans require the borrower to pay an upfront mortgage insurance premium . The UFMIP is generally 1.75% of your loan amount, and it can be rolled into the loan amount. There is one caveat: FHA loans require a minimum 3.5% down payment, not counting your closing costs. This means if you’re borrowing $100,000, you are required to pay at least $3,500 toward your down payment in addition to your closing costs.
VA loans require the borrower to pay a VA funding fee, which can be financed. This fee goes directly to the Department of Veterans Affairs to help cover losses and keep the loan guarantee program viable for future generations of military homebuyers. The amount of your VA funding fee will depend on your type of service and whether this is the first time you are obtaining a VA loan.
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.
Should You Roll Your Closing Costs Into Your Mortgage
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Buying a home is an expensive prospect. You have to come up with a down payment, pay for movers, and buy furniture for your new home. But theres another expense many home buyers forget to account for: closing costs on a mortgage.
Closing costs arent universal. Each mortgage lender sets its own fees that are then passed on to borrowers when they finalize their home loans. Typically, closing costs range from 2% to 5% of a borrowers loan amount. Nationally, they average $5,749. Your loan estimate should include your closing costs so you know what fees to expect. In fact, your lender should break down each fee for you in your closing disclosure so you know everything youre paying for.
The good news is that as a borrower, you usually dont need to come up with a check for your closing costs when you sign your mortgage. You could go that route, but you often get the option to roll those fees into your mortgage and pay them off with the rest of your loan. This applies to new home purchases and refinances. The question is: Which is the better choice?
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What Should You Do
Having a solid grasp on your financial goals will help you decide if rolling closing costs into your mortgage is a good decision for you. If you need the extra money in your pocket right now, rolling closing costs into the loan may be a good decision. It actually may help you buy a home sooner than youd be able to otherwise.
If you dont really need the money right now, you may want to skip the higher monthly costs and just pay the costs upfront to save money in the long run.
If you have any questions about this or would like to go over any specific scenarios together, please dont hesitate to reach out to our team.
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How To Lower Closing Costs
The less you have to spend on closing costs, the smaller the check youll have to write outor the less youll add to your mortgage balance. Thats why its wise to keep your closing costs to a minimum. You can do so by seeing if the seller will pay some or all of your closing costs.
In a normal housing market, its not uncommon for sellers to be asked to pick up some or all of a buyers closing costs. Sellers often are willing to do so if they want to solidify the offer theyve received. But this strategy may not work right now because its a sellers market.
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Can My Spouse Get An Fha Loan If I Have One
you can get a FHA loan in your own name. FHA will not consider spouses FICO But if you are married they will add spouses debts credit card auto the other mortgage PITI into your qualifying ratios. They wont use rental income to offset unless you spouse filed Federal taxes with rental income showing.
Why You Shouldn’t Roll Closing Costs Into Your Mortgage
by Christy Bieber |Updated July 19, 2021 – First published on April 13, 2021
Image source: Getty Images
There’s a host of downsides to rolling closing costs into your mortgage.
When you get a new mortgage or a refinance loan, you’ll usually need to pay closing costs. These are usually around 2% to 5% of your home’s value, and they can add up to several thousand dollars.
Typically, when you’re getting a new mortgage, you have to pay these costs out of pocket up front. However, when you refinance a mortgage, some lenders let you roll these costs into your new loan. That means if you were going to borrow $200,000 and pay $6,000 in closing costs, you’d instead borrow $206,000 and pay no closing costs up front.
This may sound like an attractive option since you don’t need to come up with several thousand dollars to close on a refinance loan. But, in many cases, it’s actually a far better idea to pay the closing costs up front and be done with them rather than dragging out repayment over time. Here’s why.
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