February 27, 2023
Buying a home requires planning and saving. Especially for closing costs, which can include appraisal fees, the home inspection, compliance inspections, and the Up-Front Mortgage Insurance Premium.
It takes time to save for these expenses, but some borrowers will pay more up front than others.
That is usually due to a combination of factors, but the thing new home loan applicants need to know is that your financial needs and goals will dictate how and when you pay certain closing costs.
Did you know you can finance some closing costs and have the home’s seller help you pay for others?
Government-backed mortgages like FHA home loans (including FHA One-Time Close construction loans which can help even a first-time home buyer build a home from scratch) make buying or building a new home tempting for first-time home buyers.
But there are still large amounts of money involved for things like the Up-Front Mortgage Insurance Premium.
Those expenses will need to be saved up for or financed into the loan amount where allowed.
How Much Your Loan Will Cost
Do the math on how much your loan will cost over the full term of the loan, but also in smaller increments–yearly, every five years, every ten years, etc.
This helps you get an idea of what happens if you sell or refinance your loan at those points instead of carrying the original loan to its full 15-year or 30-year loan term.
Long-Term Planning Is Crucial
If you need to save more money at the beginning of your homeowner journey, you may wish to consider rolling allowable closing costs into the mortgage (such as the Up-Front Mortgage Insurance Premium) and making the lowest down payment possible.
This will increase the amount of the monthly mortgage payment which is another reason why you will need to run the numbers–with and without the amount of the closing costs included into the loan.
Sellers Can Help With Closing Costs
Some borrowers don’t realize they can consider negotiating with the seller for a seller-paid six percent of the closing costs on the purchase loan.
Any amount over the six percent limit (based on the adjusted value of the home) is considered an “inducement to purchase” and results in a dollar-for-dollar reduction in the loan amount for any money above the six percent limit.
Discount Points As An Option
Some borrowers buy discount points on their mortgage to lower the rate and make the loan cost less over the full 15 or 30 years.
This is an option borrowers should question if they are planning to sell the house at some point –discount points save money over the duration of the mortgage thanks to lower interest rates.
If you sell the home early, you don’t get the same savings. Discount points help over the long term.
Some borrowers may consider turning to down payment assistance programs in their local area–this is permitted if the program meets FHA requirements.
The idea here is to use down payment assistance to free up funds you have saved. The money you save with the down payment assistance can be freed up for other closing costs instead.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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