MARKUS & ASSOCIATES

WHAT CAN YOU AFFORD TO SPEND ON A HOME?

The best approach in buying a home is to first understand how a home is financed. There are three crucial elements:

1. A down payment
2. Closing costs
3. The mortgage

When you know the amount of down payment and closing costs you can afford, and how much mortgage money you will be able to borrow, you can know how much home you can buy.

DO I HAVE ENOUGH FOR A DOWN PAYMENT?

A down payment is the money you pay up front toward the house. The more cash you pay as a down payment, the less money you will pay each month on the mortgage, and the lower the interest costs will be over the life of the mortgage. Typically, a conventional lender will require 20 to 25 percent of the purchase price as a down payment.

In some cases, involving an excellent credit history and sufficient income, lenders will agree to a 10 percent down payment. This may give you more cash for other moving expenses, but will also increase your monthly mortgage payments.

Loans through the Federal Housing Administration (FHA) or Veterans Administration (VA) carry very attractive down payment requirements of five percent or less. There is usually a maximum on the amount of money you can borrow with these types of loans, and VA loans are only available to veterans. FHA and VA loans are available at competitive interest rates. An additional benefit is that the seller may pay part of the points. In addition, when the time comes to sell, the next buyer may be able to assume the loan, subject to certain conditions.

If permissible, secondary financing may be used as an alternative to way to finance your new home. This means that the seller may hold a second mortgage for 10 percent of the purchase price, while the buyer puts 10 percent cash down.

Typically, conventional lenders are willing to accept a lower down payment if private mortgage insurance (PMI) is secured. PMI protects the lender in case of default on the loan. It will cost more, but it can reduce your down payment to 10 percent.

WHAT ARE CLOSING COSTS?

Closing costs are simply this: the costs of borrowing money, establishing the loan, and preparing the necessary documents to finalize the sale. These costs may be significant and are easily overlooked by a first-time buyer.

• The Costs of Borrowing Money. This includes what some lenders call "discount points," a one-time charge to adjust the yield on the loan to what market conditions demand. Each point equals one percent of the mortgage amount. Two and one-half points on a $100,000 mortgage would cost $2,500.
• The Costs of Establishing a Loan. These might include the loan origination fee, appraisal fee, and credit reports. Premiums for hazard and mortgage insurance are usually paid at closing. Also, prepaid interest will be collected for the period between closing and the end of the purchase month.
• The Costs of Document Preparation. Title costs pay for the search of public records to determine if the property you want to purchase is free from any other ownership or liens. Recording and transfer fees cover the legal recording of the deed with the proper governmental agencies as well as the transfer taxes.

Overall closing costs vary from state to state. Check with your real estate company for an estimate of your closing costs.