You
don't need a lot of money to buy a home now days. In a perfect world, you
would put at least 20% down. Your closing costs would be 3% to 5% of the
purchase price
. In that world, you would have enough
money left over to pay several months worth of housing expenses also.
This is a large amount of money. It
shows the lender that you are making a huge personal investment in the
home. It also gives you quite a bit of equity from the start. But finding
that much money can be hard in a market with rising home values. For
example, to pay 20% down, your closing costs and the first few months'
payments on a $150,000 home, you would need $40,000.
The good news is that lenders
recognize that this is a lot of money. There are some lenders that offer
loans that require as little as three to five percent down. They then sell
the loan to the Federal National Mortgage Association (Fannie Mae). Most
first-time home buyers only have to put down 5% on a home.
While that sound good, you must
remember that small down payments come with a price. You are starting out
with less equity in your home. If you put less than 20% down, you will
have to pay for private mortgage insurance, which can cost you up to
$1,000 a year. The insurance protects the bank from your defaulting on the
loan.
If you are buying in an urban area,
or have a low income level, look into programs offered by your city or
state. There are many below-market loans available with little or no down
payment required. You can also "piggy-back" your down payment by borrowing
it as a second mortgage to your home.
What are points?
Points are a fancy term for the fees
you sometimes have to pay to take out a loan. One point is equal to 1% of
your loan amount. If you have to pay one point on a $150,000 mortgage, the
point equals $1,500. Lenders will often call these points loan-origination
fees, discount fees or buy-down fees.
Points are basically finance charges paid in advance.
Lenders like to blend them in
with the interest rate
information. The more points you pay up front, the lower the interest rate
you will pay during the course of the loan. Points are 100% tax deductible
in the year you pay them.
Points are a good way to lower your
monthly payment if you already have the extra money at hand. If you don't
mind the higher payment, you often will not have to pay any points at
all.
