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The financial components of buying a home can appear to be very complex as a first time buyer. Along with making a down payment, you must also consider mortgage types, closing costs, mortgage points, and homeowner insurance.


Down Payment                                               

The amount of down payment you are required to place on your home will depend primarily on the cost of the property and the requirements of your lender. Typically, lenders use a loan to value ratio, which calculates the maximum amount of money the lender is willing to provide based on the value of the property. For instance, a loan to value ratio of 75 on a $100,000 home translates to a 25% down payment or $25,000.

If you do not have $25,000  towards a down payment there is still hope to owning a home. Many first time buyer programs allow you to finance 100% of the mortgage, meaning you pay no money down. Also, government programs provided by Freddie Mac and Fannie Mae assist prospective homebuyers through requiring smaller down payment even as low as 3%. Due to the cost savings associated with government mortgage programs, it is important to ask your lender for information on all programs including 'first time home buyers' that you may qualify for.

Generally, when your down payment is less than 20% the lender will require private mortgage insurance (PMI), which protects them  in the event of loan default. You will usually be charged .75% on the amount of the loan plus annual premiums of .25 to .5 % until the equity in your home is above 20% of the amount borrowed.

Transactional Fees

The law requires the lender to give you a Truth-in-Lending statement that discloses their effective rates of interest or annual percentage rate including: mortgage points, fees, and other charges added on top of the stated interest rate. Legally, the statement must be given to you within 3 days of your loan application or prior to settlement, whichever comes first.

Mortgage points. Lenders charge a fee to offset their cost of supplying loans to the public. Each point is equal to 1% of the mortgage amount. Therefore, 2 points would constitute a $2,000 charge on a $100,000 mortgage.

Points paid on a mortgage during the original purchase are tax deductible; however, cannot be deducted if you are refinancing.

Closing Costs. Buying a home involves many more expenses than the list price. Attorney fees, lender fees, title search and  insurance, are all part of your closing or settlement costs. Closing costs are like down payments; they represent money you must come up with before you are able to move in. A good rule of thumb to use is closing cost will run 3% of the purchase price; however, this percentage may be higher. 

Closing Statement. Before closing on your home, you should be given an opportunity to review the closing statement and have your questions answered. This statement reconciles the borrower's and the seller's cost and shows how much the borrower owes and how much the seller receives from the transaction. Make sure you review the statement carefully to verify its accuracy and consistency with the contract.

Sellers of the property may pay a portion of the buyers mortgage points and other closing costs. Usually  the agreement of which party pays what is dictated by local custom. You may be able to negotiate closing costs breakdowns individually with the seller.

Property Taxes and Insurance

When your mortgage payments include property taxes and insurance it can be categorized into four sections. The payments you make:

  • reduce the principal amount of the loan
  • pay down the interest on the money borrowed
  • pay property taxes
  • pay homeowner's insurance

Property Tax. Unlike renting, home owners pay property taxes to local governments. We have all seen the scenario played out on TV; angry taxpayers upset about a property tax increase to pay for a new sports stadium. Home owners play a role in community betterment projects. Generally, the more expensive your home, the more taxes you will pay based on the county's assessed value of your home. A rule of thumb, property taxes can vary from .5% to 2% of a home's approximate market value.

Home Insurance. Like your car insurance the cost of your homeowner's insurance will be dependent on the age, location, and type of home you have. Typically the insurance shouldn't cost more than .5% of the appraised value of your home. In cases of total loss, the insurance would cover the replacement value of the home, excluding the value of the land.

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