Purchasing a home is the ultimate American Dream and can be a really good investment. It can also be a daunting task of the unknown. Many are unaware of the additional items needed, including money, when you purchase a home. This is where the value of working with a Realtor comes into play. Your realtor knows the step by step process needed to buy a home, the amount of funds needed, and the contracts in order to negotiate the best deal whether you are on the buying or selling end. In addition, your Realtor will handle all bumps that come along during the home buying process because they deal with all the key elements – the lender, title company, and the other party of the transaction.
Your down payment is basically the amount of cash or equity you put down to secure a loan. The lender requires a minimum down payment, but you can opt to put down more. The minimum down payment amount depends on what type of loan product you qualify for.
FHA Loan: A loan insured by the Federal Housing Association. The minimum down payment for this loan is 3.5%. For example: a $200,000 purchase price X 3.5% = $7,000. You will need a minimum of $7,000 if you are looking to purchase a home for $200,000 in order to secure the loan.
Conventional Loan: A loan product that is not apart of any governmental institutions. The minimum down payment amount is 5%. For example: a $200,000 purchase price X 5% = $10,000. You will need a minimum of $10,000 down to buy a home for $200,000.
Opting to put down more money will reduce your monthly mortgage payment. Your mortgage monthly payment is reduced because you are not financing the entire loan. For example: Your total purchase price or mortgage is $200,000. If you put 20% down ($40,000) the amount that is financed through your lender is $160,000 ($200,000-$40,000). In fact, if you decide to put down 20% in cash, you will not have to pay PMI (Private Mortgage Insurance). PMI is an additional charge on your monthly payment which insures the loan until you have 20% equity (cash invested) in the home.
Closing costs are the unknown costs that occur when buying a home. Closing cost are fees charged by your lender and the title company on the buying end. If you are selling your home, your closing cost consist of paying for your title commitment and Realtor fees.
If you’re buying a home, you will need cash for closing cost in addition to your down payment. Your Realtor can negotiate on your behalf to get a portion of your closing costs paid for, but be aware that this is harder to obtain in a Seller’s Market.
Closing cost are typically 4.5% of the purchase price plus any pro-rated taxes for the year. So if you are looking to purchase a home for $200,000, your closing cost will be approximately $9,000.
The total minimum amount needed to purchase a home using the $200,000 scenario would be approximately $16,000-$19,000. If you purchase a home for less than $200,000, then your total cost will be less. There are also down payment assistance programs which will grant you money towards your down payment and/or closing cost. These may be income restricted and require certain debt to income ratios.
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