Downpayment vs. Closing Costs
Whats the difference between a Downpayment and Closing Costs when purchasing a home???
This is probably one of the most common questions I get from homebuyers, especially first time homebuyers. I know this can be a little bit confusing for some people so I wanted to go over exactly what a Downpayment is versus what Closing Costs are: PLEASE NOTE: These are two
totally separate set of fees and are not one in the same!
Down payment: Your down payment is going to be determined by which type of mortgage your choose, your credit history, your income, and the price of the home you are purchasing. For many first time home buyers, your down payment will normally be between 3.5%-5%.
**There are many down payment assistance programs out there to help you come up with your down payment when purchasing a home. – Blog soon to come on that!!!!
Closing Costs (can also be referred to as settlement expenses): Closing costs represent payment required by a lender to secure a loan. Many people associate all closing costs with the lender, which is incorrect. These are just an estimate of fees you may incur with purchasing or refinancing your home. These fees are paid when a contract has been executed and the title is ready to be transferred to the buyer – this is known as the “closing”. On average, closing costs run around 3% of the purchase price. This percentage may vary, depending on where you live.
Some of the most common costs are things such as title searches, recording fees, appraisal fees, homeowner’s insurance, mortgage insurance (only needed if you are putting less that 20% down), loan application fee, lawyer’s fee, credit report and other expenses. Your lender will be able to give you a Good Faith Estimate that will give you a more precise estimate of your closing costs.
Points, which can also be included in your closing cost expenses, are finance charges that are calculated by the lender at closing. Each point equals 1% of the loan amount. For example, three points on a $100,000 loan equals $3,000. Lenders may charge one, two or three points in up-front costs in addition to the down payment. The more points you pay, the lower your interest rate will be and the lower your payment will be. In some cases, you may even be able to finance the points.