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April 23rd, 2011

Homebuyers: Don’t forget to save for closing costs



iStock_house of moneyWhen you’re saving to buy a home, it’s easy to focus all your attention on a home’s price and the loan’s interest rate. However, you can’t forget to factor in closing costs when determining your level of affordability.

What are closing costs?

A good question, one that you may think every homebuyer should know right off the bat. However, the truth is, there are several costs and servicers that factor into your particular loan’s closing costs:

The appraisal, the loan-origination fee, homeowners insurance, property taxes, title insurance, points, attorney fees, recording and transfer charges, escrow fees and more. “Some people like to say that any time a piece of paper moves in the transaction, there’s a closing cost, says Ilona Bray, co-author of “Nolo’s Essential Guide to Buying Your First Home.”

How much will closing costs run me?

Another good question. According to personal finance guru Jean Chatzky, “[Closing costs] can add up to 3 percent to 6 percent of the sale price. Even at the lower end of that range, that’s $6,000 on a $200,000 home, $9,000 on a $300,000 one.”

Preparing yourself for closing costs and a down payment

Especially these days when lenders are requiring borrowers to come to the table with more money down, coming up with all the cash for a large down payment and your closing costs is going to require a lot of saving.

Here are some ways to come up with that cash:

Gifts: Ask parents or relatives for a gift. FHA and conventional mortgages allow gift funds from relatives for down payments and closing costs of up to 6 percent.

Sell your stuff: When you buy your home and move, you will be cleaning out your stuff anyway — why not do it sooner and sell off items on eBay or other internet auction sites? Have an old baseball card or record collection you no longer feel as nostalgic for? Turn them into part of a down payment for a new home. Make sure you document your transactions to show where and how you received the funds for your mortgage broker.

Your 401(k): “If your employer allows you to borrow from your 401(k) plan (most do), you can take the lesser of 50 percent of your vested balance or $50,000,” writes Gina Pogol, HSH.com staff writer. “You are typically granted up to five years to pay the loan off, unless you are borrowing the down payment for your first home; in that case, you get more time.”

“You have to pay interest on the loan, but you are borrowing from yourself, so you’re paying interest to yourself. Getting the loan is relatively easy; you just have to complete a short form or make a phone call.”

So, with today’s strict underwriting standards you’re going to have to save a lot more for a down payment. But remember, there are thousands in closing costs to save for as well.

2 Responses to “Homebuyers: Don’t forget to save for closing costs”

  1. Nikki Smith Says: April 25th, 2011 at 11:44 am

    Discounts on closing costs do exist in the form of reissue discounts and other instant rebates that some independently owned title companies offer. I found this article to be quite helpful: http://dc.urbanturf.com/articles/blog/10_things_you_should_know_about_closing_costs/3256

  2. 6 Techniques To Conserve Income On Home Loan Closing Fees | Jack Barry Realtors Says: April 27th, 2011 at 2:51 pm

    […] Homebuyers: Don’t forget to save for closing costs (hsh.com) […]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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