Today’s flexible home loan programs make the down payment less of a challenge than it was when your parents first purchased a home.

In the past, saving money for a down payment on a home was often the largest obstacle to homeownership with lenders requiring a minimum of a 20% down payment. But today’s flexible home loan programs make this issue less of a challenge, with some programs allowing you to put very little down (3% or less). In fact, you may qualify for programs that don’t require down payments at all.

Some homebuyers may be eligible for local down payment assistance programs.

If you decide to use less than a 20% down payment, your lender may require Private Mortgage Insurance (PMI). These insurance programs protect the lender in the event you do not fulfill your commitment to repay the mortgage.

What About Closing Costs?

Closing costs cover the amount of money you pay to close a mortgage loan aside from the down payment. The amount you pay in closing costs varies among lenders, mortgage products and localities. The closing cost fees generally fall into one of three categories:

  1. out-of-pocket expenses,
  2. pre-paid items and
  3. points

Out-of-Pocket Expenses

Usually cover third-party services that aredirectly charged to you, such as fees for appraisals, attorneys, credit reports, title (deed recording), or tax services. Which services you must pay for varies on the property location and home financing program. If you don’t understand what a particular fee covers, or why you are required to pay it, ask your home mortgage consultant to explain.

Prepaid Items

Can vary based on the type of property and the timeof the closing, but they generally include homeowner’s insurance, mortgage insurance, and fees associated with establishing an escrow account. Escrow accounts are set up by lenders to pay property tax and insurance premiums. Instead of paying the entire premium every six or twelve months, the borrower pays a portion of the cost along with every monthly mortgage payment. This helps the borrower avoid the hassle of planning for the large payments, while reassuring the lender that tax and insurance payments are always up to date. Using an escrow account is an option and not a requirement

Points

Are fees, with each point representing 1% of your loan amount,that cover the cost of your mortgage loan. Generally, points can be split into two categories:

  • Origination points: This is an amount collected by the lender for making the loan.
  • Discount points: As discussed elsewhere in this guide, this is a fee that allows you to buy down your interest rate. In other words, in return for paying more discount points upfront, you can lower your interest rate and thus your monthly payment.

To make the best apples-to-apples comparison on lenders and home financing packages, be sure that the rates all have the same number of total points and that you factor in the total amount you will be paying in closing costs. While one loan may offer a lower rate, it may also require you to pay a higher number of points at closing and more money out of pocket for you. Also, don’t forget to consider loan features and service after closing in addition to the rate, APR, and points when you compare different loan programs.

Feel free calling me and I can give you information on average closing cost percentages for specific areas and loan programs. And, shortly after you apply for a home mortgage, you will be sent a Good Faith Estimate, which provides details on the approximate costs you will be required to pay at or before closing. While it is only an estimate, it can help you budget for your closing.

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