How much cash will I need for closing costs?
Closing costs generally range from 2% to 3% of your loan amount. Closing costs can be divided into three main categories:
- Lender fees. Fees can include origination, points, application, credit report, and appraisal.
- Third-party fees. These fees vary by state and the company you select to close your loan. They can include fees for closing, title exam, title insurance and recording.
- Pre-paid items. These are items collected at the time of closing but are not really considered costs (for example, interest, taxes, and hazard insurance).
- Your monthly payments as a percentage of income.
- How much cash you have for the down payment and closing costs.
- Your credit history.
- Fixed-rate mortgage. You pay the same interest rate and same monthly payment of principal and interest for the duration of the mortgage. The most common terms are 30, 20 and 15 years. Fixed-rate mortgages are best if you plan on being in your home for a while.
- Adjustable-rate mortgage (ARM). The interest rate stays fixed for an initial interest rate period, which ranges from 1 to 7 years. Then the rate will adjust up or down annually for the life of the loan based on a specified index. An ARM is a good option if you believe interest rates will go down over the next few years or if you plan on staying in your home 5 to 7 years or less.
- Combination loan. A loan where you receive a first mortgage combined at the same time with a second mortgage. This option may help you avoid the costs of private mortgage insurance (PMI) and/or the higher rate of a jumbo loan with as little as 10% down. The most popular combinations are 80-10-10 (80% first, 10% second, 10% down), 80-15-5 (80% first, 15% second, 5% down).
- Lower down payments than most other financing options so you won't need as much cash to buy a home.
- Competitive interest rates.
- Manageable payments for every budget.
- Reduced closing costs and mortgage loan fees.
- Income tax reduction. In the early years of a mortgage, most of your monthly payment covers interest on the mortgage. In most cases, the mortgage interest (and property tax) is deductible from your taxable income, lowering your overall tax bill. Therefore, your after-tax cost of home ownership may be lower than renting. There may be tax implications if you later sell the home at a profit. Consult your tax advisor for more information.
- Tax deductible borrowing power. As your home's equity increases, you can borrow against it for almost any need with a home equity loan or line of credit.