Next to your down payment, two of the most important things you need to think about as you complete your home purchase are your interest rate and your closing costs. Here’s what you need to know.
What’s Your Interest Rate?
Your interest rate is a huge part of your home loan agreement, and costs you the most over time. The first decade of your mortgage, nearly your entire loan payment each month goes to paying down interest. If you plan to sell or refinance pretty quickly, this may not feel like a burden, but long term even just one interest point can mean tens of thousands of dollars spent.
Consider a $160,000 home loan with a 30 year term. You’re looking at an interest rate of 3%, and another at 4%. That extra point in interest could cost you an extra $30,000 by the time you pay off your house. Imagine what you could do with $1000 a year! This is why buying discount points is so popular if you have extra cash above and beyond your down payment. In some cases, buying a lower interest rate can save you even more than making a bigger down payment with that same cash.
Your Closing Costs
You need to have a plan for closing costs starting from the beginning of the loan application process. Don’t sink every penny you have into your down payment and get caught flat footed at closing. Instead, discuss how much closing costs might be with your LO, and then hold back that much. Double check your loan estimate to make sure you put back enough, and then check again when you get your closing disclosure.
Sometimes, you can get the seller to pay the closing costs, or your lender will pitch in to help close the deal. Remember that your earnest money that is in escrow can be applied towards closing costs, too. In general, expect to pay 2-4% in closing costs (based on the total purchase price.) This includes prepaid items like property taxes and homeowners insurance.
If you consider your insurance rate and closing costs before you start home shopping, you can create a plan to minimize their impact on your finances.
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