Buying Info - The Mortgage

What Can You Afford to Spend on a Home?

The best approach in buying a home is to first understand how a home is
financed. There are three crucial elements:

a down payment
closing costs
the mortgage

When you know the amount of down payment and closing costs you can
afford, and how much mortgage money you will be able to borrow, you can
know how much home you can buy.

Do I Have Enough for a Down Payment?

A down payment is the money you pay up front toward the house. The more
cash you pay as a down payment, the less money you will pay each month on
the mortgage, and the lower the interest costs will be over the life of the
mortgage. Typically, a conventional lender will require 20 to 25 percent of the
purchase price as a down payment.

In some cases, involving an excellent credit history and sufficient income,
lenders will agree to a 10 percent down payment. This may give you more
cash for other moving expenses, but will also increase your monthly mortgage
payments.

Loans through the Federal Housing Administration (FHA) or Veterans
Administration (VA) carry very attractive down payment requirements of five
percent or less. There is usually a maximum on the amount of money you can
borrow with these types of loans, and VA loans are only available to veterans.
FHA and VA loans are available at competitive interest rates. An additional
benefit is that the seller may pay part of the points. In addition, when the
time comes to sell, the next buyer may be able to assume the loan, subject to
certain conditions.

If permissible, secondary financing may be used as an alternative to way to
finance your new home. This means that the seller may hold a second
mortgage for 10 percent of the purchase price, while the buyer puts 10
percent cash down.

Typically, conventional lenders are willing to accept a lower down payment if
private mortgage insurance (PMI) is secured. PMI protects the lender in case
of default on the loan. It will cost more, but it can reduce your down payment
to 10 percent.

What are Closing Costs?

Closing costs are simply this: the costs of borrowing money, establishing the
loan, and preparing the necessary documents to finalize the sale. These costs
may be significant and are easily overlooked by a first-time buyer.

The Costs of Borrowing Money

This includes what some lenders call "discount points," a one-time charge to
adjust the yield on the loan to what market conditions demand. Each point
equals one percent of the mortgage amount. Two and one-half points on a
$100,000 mortgage would cost $2,500.

The Costs of Establishing a Loan

These might include the loan origination fee, appraisal fee, and credit reports.
Premiums for hazard and mortgage insurance are usually paid at closing. Also,
prepaid interest will be collected for the period between closing and the end
of the purchase month.

The Costs of Document Preparation

Title costs pay for the search of public records to determine if the property
you want to purchase is free from any other ownership or liens. Recording and
transfer fees cover the legal recording of the deed with the proper
governmental agencies as well as the transfer taxes.

Overall closing costs vary from state to state. Check with your real estate
company for an estimate of your closing costs.