Financial Facts: You need more than just a down payment
Ryan Summerlin February 9, 2013
When it comes time to buy your first home you need to know that a down payment is just part of the real costs in buying a home. The down payment is a big part of the purchase, but there are other costs that must be paid by someone, and that someone is usually the buyer.
If you are paying cash for a home many costs are eliminated, but how many people today pay cash? From my background as a NYSE stockbroker, let me tell you that paying cash is generally not the smartest thing to do. Cash is king and cash can do a lot of things, but cash real estate deals, in many cases, cost more than having a mortgage.
So back to the cost of buying a home. When you have a new mortgage you will have costs such as appraisal of the property, title Insurance, homeowners insurance and other fees that can add up quite quickly.
On the purchase of a $400,000 home you should plan for an additional 2-3 percent for the various closing costs and such items as taxes and insurance.
Another item that you may have to plan for if you are buying a condo is the homeowners association fee. More specifically, some associations require that new owners make a payment of 2-3 months of association dues to keep the cash reserve for the association. Then, when you sell your condo you are reimbursed this amount at the time of closing the sale.
Prepaid items are an expense at closing that includes real estate taxes and homeowners insurance. A full year of homeowners insurance will be paid at the closing and part of this year’s real estate taxes will be escrowed so that when the county sends out tax statements next year, the lender will hopefully have sufficient cash to pay this year’s taxes. Keep in mind that not all lenders require you to escrow funds, this means that the lender will collect one-twelfth of the taxes and insurance each month. Most lenders now allow you to pay the taxes and insurance direct, but most lenders add a onetime fee, as they really want to pay these fees direct.
One way for you, the buyer, to finance these costs into the loan is to have the seller pay them. This sounds a little odd, but what you do is raise the price to offset the dollar amount of the closing costs. This can be done with the help of your mortgage professional and your Realtor. Keep in mind that the home must still appraise for a value equal to or more than the purchase price.
The bottom line is that you as a buyer need to know well in advance of making an offer to purchase a home that the down payment is just part of the final equation. Make an appointment with a mortgage professional today to become educated in what can and cannot be done. Know your options before you sign on the dotted line and end up regretting the fact that time and knowledge is an important factor when making what may be the biggest investment of your life.
For answers to your mortgage related questions call Bob Kieber at (970) 453-4700 or email him at firstname.lastname@example.org. Bob is a local mortgage lender with Centennial Bank. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country. Member FDIC, Equal Housing Lender. NMLS Bank #401640 Broker #289610. For tax benefit information please consult with a professional tax advisor. The opinions expressed are those of the individual, and do not necessarily reflect those of Centennial Bank.