|New Homebuyer Top Stories||Homebuying Q&A: Ask Our Expert|
Q: What’s the best way to pay for my mortgage closing costs?
A: There's no one best way to cover the legitimate fees you'll encounter when getting a mortgage, and they can be substantial. Generally, there are three ways to approach the issue. Each of these three options has different effects on your mortgage cost over time:
- Pay them out-of-pocket today. Paying them today brings the lowest interest rate but the highest initial expense.
- Add them to the loan amount (provided you have a sufficient down payment). Adding them to the loan amount brings higher total costs over time.
- Trade them off for a slightly higher interest rate. Trading them for a higher rate also means higher total costs over the long term.
It should be noted that most borrowers don't have all three choices available, but usually at least two can be found in the market. How much a choice will cost or save you also depends upon how long you hold onto the loan.
Since there's a lot of math to be done to see those cost effects over time, HSH.com has developed a great calculator which shows homebuyers how to pay closing costs.
(For refinancing homeowners wrestling with how to best finance your refinance, HSH.com’s Tri-Refi Refinance Calculator is the proper tool.)
What works best in your situation will depend upon your cash position, whether those funds would be better used to make a larger down payment (possibly avoiding mortgage insurance), or held for reserves in case of emergency.
Even if you can pay the costs out-of-pocket today, it may be better over your time horizon to finance them--doing so may cost you less over your time frame.
Are you ready to buy a home?
Chances are your home purchase will be the largest transaction you embark on over the course of your lifetime. That in itself is reason enough to make sure you’re not only prepared but well-educated when it comes time to buying your home. Shopping for your mortgage is at least as important as shopping for your home, because the right home loan can save you tens of thousands of dollars. Especially for first-time homebuyers, the more you understand about your mortgage and the homebuying process, the better off you’ll be and the more money you’ll save.
Before you begin shopping for a home loan, you need to ask yourself a few questions:
- How much home can I afford?
- How long do I plan on staying here?
- Am I ready?
Before you worry about Realtors, property listings or locking in a mortgage rate, you must first determine how much home you can afford. HSH.com offers homebuyers several home loan calculators that can help give you a sense of your level of affordability. Our How much house can I afford calculator is just the tool to get you started. Simply plug in a few sets of numbers (e.g., annual income, projected down payment, your monthly bills) and you’ll get a sense of your price range.
However, while affordability calculators can certainly give you a good starting point in terms of learning how much house you can afford, only you truly know how well a monthly mortgage payment, not to mention taxes and insurance, will fit into your budget and lifestyle.
On paper, you may qualify for a lot more or a lot less than you should spend. So when determining what you can afford, sketch out what you think your life may look like one, five or 10 years down the road. Look at your goals and what kind of money you need to meet them, and where it's going to come from. Decide what payment works for you, and then enter current mortgage rates into our home loan calculator to find a projected loan amount and maximum purchase price.
This brings us to the next big question: How long do you plan on living in the house you’re buying? Is this a starter home or a place you see yourself raising your family in? Understanding your life’s plans and future goals is not only crucial in deciding how big a home you should buy, but finding the right mortgage product to match.
Sure adjustable rate mortgages have gotten a bad reputation over the last few years, but if you aren’t planning to stay in your prospective home very long, these adjustable-rate products offer the opportunity to take advantage of even lower mortgage rates.
Yet remember, it’s hard enough to make plans for the upcoming weekend let alone five, 10 years down the road. This is why most homeowners prefer the stability that comes with a 30-year fixed rate mortgage. If mortgage rates do fall in the future, you can always crunch the numbers to determine if a refinance can save you cash each month.
Are you up for the task?
HSH.com visitor and recent first-time homebuyer Eric told us that when he and his wife went to look at houses with their real estate agent, they could tell a home “just wasn’t for them” before even stepping foot out of their car. Yet finding and maintaining your dream home has to do with a lot more than just aesthetics.
Owning a home is about a lot more than simply being able to afford your monthly mortgage payments. There are recurring maintenance costs to consider (you should budget saving at least 2 percent of your home’s value each year for repairs), property management costs to plan for (if the home you’re buying has a decent-sized property, you will have to dedicate a lot more time and money to your investment as opposed to someone who purchased a condo or townhome), and those unexpected emergencies (like your water heater bursting in the middle of the night) that you’ll surely have to deal with.
We asked first-time homebuyer Michael Herley from Coatesville, Pennsylvania what was the one thing he wished he knew before buying his home. “I wish I would have appreciated the gravity of purchasing a house,” he explained. “Don't get me wrong, our place is beautiful and I love it, but the work that goes into everything is much more than one could ever know. Do not think that your work is over once you have found your dream home -- rather it has just begun.”
Continue your education
As Mr. Herley mentioned, once you’ve found your dream home, the work has just begun. On a daily basis HSH.com publishes new information for not only homebuyers but for homeowners as well on a wide-range of topics. We cover everything from how to find the best real estate agent, to mortgage rate forecasts, to home equity loans, refinancing and home maintenance. Good Luck.