Closing costs and down payment fees tend to be a source of stress for potential home owners, but they don’t need to be. Additionally, there are a lot of misconceptions surrounding how much cash you need to put down to purchase a home. The popular theory is that you shouldn’t buy a home until you have a 20% down payment, but that’s not always the case. The majority of home buyers purchase their homes with 10% or less as a down payment, and some lenders and federal programs that will lend to borrowers with just 3% for a down payment.
Granted, if you’re able to offer more for your closing costs and down payment fees, it will mean you won’t have as much to pay on your mortgage every month – and that means owing less to the bank. If you are able to put down at least 20%, there’s the benefit of not having to deal with the financial obligations associated with PMI – or Primary Mortgage Insurance – which covers your lender if for some reason you’re unable to meet your financial obligations.
Of course, it all depends on your financial capabilities. It doesn’t make sense to “break the bank” to come up with a 20% cash down payment; cause yourself undue stress, just to deplete your savings and cash reserves. Yes, you’ll be responsible for PMI if you put less than 20% down, but you may still qualify for the loan and be able to purchase your dream home. And once you’ve reached 20% equity in your home, you can cancel your PMI payments (Conventional loans only).
Make sure you evaluate your finances and financial health to ensure what percentage you can afford for your down payment. Your lender and real estate professional should be able to help you with this part of the process, and help you determine which options are best for you.
Closing costs – or settlement fees – are paid when you close on your new house. These fees are charged by your representatives helping with the purchase of your home, which includes your lender, real estate agent, and others, who have assisted during the transaction. Usually, closing costs come to 2 to 5% of your home’s purchase price.
The costs include:
- Government recording costs.
- Fees associated with the appraisal.
- Fees associated with your credit report.
- Lender origination fees.
- Title and tax service fees.
- Survey and attorney fees.
- Underwriting fees.
As you’re making plans for the purchase of your home, don’t forget the importance of your down payment and closing fees. Your lender and real estate professional are on hand to help you navigate this part of the process, and help you make decisions that support your financial stature and needs.