Understanding Closing Costs
When you apply for a loan your lender is required by law to give you a Good Faith Estimate of your closing costs. This estimate is based on local practices as well as the sales agreement with the seller. Both the buyer and the seller are responsible for portions of the closing costs. Some of the costs depends on where you live and the local custom as to who pays what.
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Zero-down loans are relatively new but are gaining popularity as lending institutions become more comfortable with them. In most cases, however, you will need to put some money down. The lender feels that the more money you put down for the home the more likely you are not to default on the loan because you have equity in the home. Although it used to be commonly recommended to put down about 20 % or more of the cost down, known as 80% Loan To Value ratio (LTV), more lenders are lending on far less as a down payment. If you put down less than 20% you may be required to pay Private Mortgage Insurance (PMI) which protects the lender in the event you default on the loan, however some lenders are waiving PMI to stay competitive. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. It's determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Remember that under the federal law the lender is required to cancel the PMI once the LTV ratio reaches 78% or, in other words, when your mortgage amortized to 78% of the original value of the house. The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78% mark. For Federal Housing Authority (FHA) loans, you may only need to put down as little as 3% of which 2% can be a gift from a friend, relative or Nonprofit organization. However, you will need to pay PMI on this loan. A new development is that nontraditional lenders are jumping into the mortgage game. They allow you to borrow on a margin, which basically means you are essentially using your brokerage account as collateral for whatever you are buying. Your brokerage account may be your retirement account or investment assets you don't wish to sell in order to come up with down payment cash. If your accounts are with financial institutions, investigate if they offer this option. With new loan options being created nearly on a daily basis, it is highly suggested you talk with your lender to choose the right loan for you. If you'd like, I will be happy to give you the names of mortgage brokers in this area who have proven to be most helpful.
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