Mortgage Loan Down Payment and Closing Costs
When you buy a home, there are several up-front mortgage costs you should be aware of, particularly mortgage loan down payments and mortgage closing costs.
Mortgage Loan Down Payments
A mortgage loan down payment for a new home purchase is usually between 3% and 20% of the total cost of the new home. The amount of the required mortgage down payment depends on your credit history, income, the cost of the home, and the type of mortgage you choose. Many first-time homebuyers put down 3 to 5% of the cost of the home, although there are options available requiring less than 3% so ask your mortgage lender if this is something you are interested in.
If your mortgage down payment is less than 20%, you will likely need private mortgage insurance (PMI). This is insurance you pay to protect the mortgage lender if you don’t repay your home loan in full. PMI can be added to your closing or monthly mortgage costs. When you apply for a home loan, you should also have at least two month’s worth of mortgage payments saved, called reserves.
Some borrowers are using 80-10-10 mortgage financing which allows them to finance 90% of a home’s purchase price without paying PMI. 80-10-10 financing is essentially two mortgages – the first mortgage for 80% of the purchase price and a second mortgage for 10% of the purchase price (these are often from the same mortgage lender). The two combined allow the borrower to finance 90% of the mortgage but without paying PMI.
Most mortgage lenders want to know the source of your new home purchase down payment and have restrictions about how much can come from gifts from a relative. Ask your mortgage lender for more information.
Closing Costs
Mortgage closing, or settlement, costs are mortgage loan fees you pay when you actually get your mortgage loan from your financial institution. These include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other settlement costs. You should negotiate for lower fees the same way that you should negotiate for the best rate. Some fees, such as taxes, may be fixed but your mortgage lender may be willing to negotiate others.
Mortgage closing costs generally range between 2 to 7% of the new home property value. You’ll receive an estimate from your mortgage lender after you apply for a mortgage loan. You must pay these costs before you move into your new home.
About PMI Insurance
Generally, if your new home purchase down payment is less than 20% of the price of the home, you will be required to purchase Private Mortgage Insurance (called PMI or sometimes MI). This protects the mortgage lender if you should be unable to pay off the mortgage loan.
Federal law requires PMI to be cancelled under certain circumstances; for example, when you have paid off a certain percentage of your mortgage or your home’s property value has increased to a certain percentage above the value of the mortgage.
Contact your mortgage lender for specific information about the status of your private mortgage insurance.
Make sure a title search is done! A title search is used to investigate the history of a property’s ownership. You can search public records to check for liens against the property, unpaid claims, restrictions or problems, and proof that the seller can transfer free and clear ownership. Your title insurance is issued, as well as a survey, termite certificate, and homeowner’s insurance, at closing.
For more helpful mortgage tips on a down payment, mortgage refinancing, home loans, reverse mortgages or a home equity line of credit, contact FreeLoanComparison.com today!
Last update: November 14, 2008
