By Dian Hymer
Home prices are rising in many areas. This poses a challenge for homebuyers who are stretching to come up with enough cash for a down payment and closing costs.
Let's say you have enough money to buy a $250,000 home if you use a 20 percent cash down payment of $50,000. If home prices rise 5 percent before you buy, the same house will cost you $262,500. To make a 20 percent down payment on the higher price, you'll need an extra $2,500 in cash.
One option to keep the cash requirement down is to increase your mortgage amount. But you have to qualify with your lender for the higher monthly mortgage payments.
Another way to ease the cash crunch is to lower your closing costs. Closing costs are the fees associated with a home purchase. These fees vary from area to area, but they often include loan fees (such as points, fees for appraisal, credit report and document preparation), transfer taxes (if there are any), title insurance (paid by the seller in some areas), homeowner's insurance, pro-rated interest on your new mortgage, property taxes, mortgage insurance, impounds, attorneys fees, and escrow or closing fees.
For most buyers, the fees charged for taking out a new mortgage constitute the largest part of their closing costs. For example, if you're buying a $250,000 home with a 90 percent mortgage, your mortgage amount will be $225,000. If the lender charges 1 point to originate the loan, you'll pay $2,225 at closing. (One point equals 1 percent of the loan amount.)
A sure way to cut closing costs is to take a low- or no-point mortgage. Keep in mind that there is a trade-off between points and the mortgage interest rate: the lower the points, the higher the interest rate, and vice versa. But if you're short of cash, it may be worth it to pay a higher interest rate.
Closing the sale late in the month will save on your closing costs. Why? Because lenders collect interest for the remainder of the current month when you close. If there are only a few days left in the month, you'll only pay a few days worth of interest.
You can reduce the amount of cash needed to close by increasing the amount of the deductible on your homeowner's insurance policy. The larger the deductible amount, the lower the premium. Most lenders require buyers to pay their first year's homeowner's insurance premium in advance.
First Time Tip: You can significantly lower the cash you'll need to close if the sellers will give you a credit for your nonrecurring closing costs. Nonrecurring closing costs are those costs that are paid on a one-time-only basis at closing. They include points, title insurance and transfer taxes. Lenders limit how much they'll allow a seller to credit to a buyer. Usually it's 3 or 6 percent of the purchase price. And the credit can't exceed the actual amount of the buyers' nonrecurring closing costs.
When sellers credit money to buyers, this lowers their net proceeds from the sale. This means the sellers are effectively lowering their sale price. If you're bidding against other buyers, you may need to increase your offer price to cover the amount of the credit you want from the seller in order to keep your price competitive with the other offers.
The Closing: Some mortgages allow the borrower to finance part or all of their closing costs. Also some lenders permit a relative to gift you money to cover closing costs.
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