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.
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.
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
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