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What are the up-front costs when I buy a home?

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Mortgage application fees

Mortgage application fees include “origination” (or “service”) fees. These can be flat fees, or the fees may based on 1% to 2% of the total purchase price. Also included are appraisal, underwriting and credit reporting fees, which can be built into your closing costs.

Earnest money

Earnest money is a deposit that you, as the prospective buyer, will put down when you make an offer on a home. As the word “earnest” implies, this deposit represents your serious intention to buy. If your bid is just one of multiple bids made on the home, the earnest money you put down (also known as a “good faith deposit”) may influence the seller’s decision-making in your favor. There are a few factors that can influence the amount of earnest money you decide to put down when you make an offer. Your real estate agent will help you determine the amount of earnest money you should put down in order to put you in the best position to win the bid.

Down payment

Often you can get the best mortgage rate by paying a higher mortgage down payment. Down payments can range anywhere from 0% to 20% or more of the total cost of the home. Fifteen to 20% is ideal. Paying mortgage points up front can also help lower payments and interest rate on your home mortgage.

Mortgage points

Mortgage points are a fee that is paid when you take out your home mortgage loan. They are essentially a form of pre-paid interest, paid up-front, in exchange for a lower interest rate and lower monthly payments. This practice is known as “buying down” your interest rate.

Each mortgage point represents 1% of the amount of the mortgage; so one point on a $130,000 mortgage represents $1,300; two points represent $2,600, and so on. You may be required to pay a number of points as an origination fee, as a closing cost, or as part of the down payment. However, some points are optional. Your realtor will guide you through the decisions you make regarding payment of mortgage points.

Typically, buying additional points is done to lower the rate on a fixed-rate mortgage. Buying points for an adjustable rate mortgage provides a discount on only the initial fixed period of the loan. For that reason, people don’t normally buy additional points for an adjustable rate mortgage.

When buying mortgage points, PAY ATTENTION TO THE NUMBERS. Because you are paying more up front, the reduced interest rate will save you money over the long term – but not over the short term. The longer you plan to live in your new home, the better the chance you will reach the “break-even” point, where the interest you have saved compensates for your initial cash outlay. If you have a shorter-term plan and have limited cash – or if you would benefit more from a bigger down payment, paying points may not give you the greatest benefit. Talk with your mortgage loan originator about whether buying points is the best option for you.

Closing costs

Final closing costs typically range from 2% to 4% of the total loan amount. Some buyers are allowed to roll closing costs into their mortgage loan, allowing them to pay off these costs as the mortgage is paid down. Closing costs are all paid at once, and can include:

  • Mortgage application fees (see above)
  • Mortgage points (see above)
  • Attorney fees
  • Inspections and surveys
  • Title insurance and title search
  • Escrow deposit
  • City recording fees

Home ownership expenses

Owning a home requires a financial commitment beyond your monthly mortgage payment. Make sure you’re taking all of these costs into account when figuring how much house you can afford. Prior to committing to a home mortgage, it is very important to have a good idea of all the costs involved in home ownership aside from your mortgage payment. Home ownership costs typically include:

  • Mortgage insurance (required for most mortgages with down payments less than 20%)
  • Home insurance
  • Utilities
  • Repairs
  • Property taxes

Use this Home Affordability Calculator to start figuring your options.

Home Affordability Calculator

Planning and saving tips

If you’re still saving for your first home, here are some tips and advice that can help.

  • Saving for a higher down payment can mean a lower APR and lower monthly payments.
  • Maintaining a regular and reliable income improves your standing with lenders.
  • Combining stated income with a partner or spouse can give you an advantage.
  • Consistently paying your bills on time contributes to a good credit score.
  • Limiting your monthly debt also helps improve your credit score.
  • Remember that generally, your mortgage payments should represent less than 28% or your income.

Building sound finances and a rock-solid credit rating before you buy will help you afford more home. This can also help you compete more effectively for the house you want; make it easier to handle the up-front costs of buying a home; and make home ownership more fun and easier to manage.

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