When you purchase a house, you have a down payment and closing costs that must be taken into consideration. Closing costs on a home purchase are akin to tax, docs and licensing when you purchase a brand-new car. Here’s how to plan and budget for closing costs so you can best determine what your borrowing power and purchase price point might look like…
When you make an offer to purchase a house you have two types of closing costs; reoccurring closing costs, which are interest, taxes and insurance and non-recurring closing costs which are often considered the junk fees such as a lender fee, title fee, escrow fees, etc. Non-recurring closing costs are the one-time fees that you pay in accordance with borrowing money to buy a house.
Factors that influence closing costs:
Your closing costs can also vary if you desire to have an impound account for property taxes and insurance to be paid monthly by the lender.
Mortgage tip: if you’re looking at a VA loan, USDA loan or an FHA loan you must have an impound account for taxes and insurance regardless of what your down payment is.
If you’re looking at a conventional mortgage or a jumbo mortgage if you’re putting down 20 percent you can avoid having an impound account for property taxes and insurance.
In the state of Ca., you can put down 11.1 percent. The on a conventional or a jumbo mortgage and not have an impound account established where your monthly mortgage payment is only principal and interest. When you have an impound account on your loan the lender must collect for future taxes and insurance that are not yet due which is in the form of a closing costs which can impact your cash to close.
The following is an estimated table to use if you have at least a 700-credit score or better.
Purchase price $300,000 and closing costs with impounds and taxes and insurance 3 percent of the purchase price
Purchase price $400,000 and closing costs with impounded Insurance about $10,000 or 2.2 percent of the purchase price
Purchase price $500,000 and closing costs with impounds is the same thing as $10,000
Purchase price $600,000 and closing costs are starting to climb to about $11,000
Purchase price $700,000 and closing cost is about $12,000
Purchase price $800,000 and now looking at $12- $14,000
Hopefully this should give you a good barometer of price point to closing costs and what they generally should be.
Here’s an example of a scenario that is just not feasible:
A purchase price at $500,000 with A total closing cost at $7,500. Let’s assume it’s a FHA mortgage with a 616-credit score.
Closing costs on a purchase like this automatically would be at least $10,000 before any points. Another form of a closing cost that can make your cash rise is paying discount points which is an elective item if your credit score is 700 or higher. If your credit score is less, you don’t necessarily have to pay points, but your interest rate on your mortgage will be higher. Points are upfront overhead that are paid to lower your monthly mortgage payment, but it is not always an elective option if your credit score is sub 700. Using the above example; it’s realistic that you might be paying 1 to 1.25 percent of the loan amount in the form of discount points plus the $10,000 which means closing costs on that type of scenario might equate to $12-13k as there is also an establishment for the impound account for taxes and insurance.
Mortgage tip: closing costs on a purchase are always more than on a refinance. The reason being is because you’re taking title to the property for the first time and if you’re using a loan to buy a property there’s two forms of title insurance, an owner’s policy and a lender’s policy. On any subsequent refinancing you do in the future the closing costs are less because you already own the property and there is only lenders policy that is paid when you remortgage your property.
Looking to buy a home with low closing costs? Get a no cost quote now.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.