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Understanding cash to close

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It's common for buyers to refer to the cash needed to close on a home as "closing costs" or think it is limited to just the down payment amount. The cash needed to close is actually made up of three different categories of expenses. Closing costs, prepaid costs and down payment.

In general, closing costs can range from 2% to 5% of the total loan amount. According to analyzed data from the Home Mortgage Disclosure Act (HMDA), comparing the top 10 mortgage lenders in the U.S., using a Mortgage Broker instead of a Retail/Correspondent Lender saves a borrower over $9,400 in costs on an average 30-years fixed conventional mortgage. So understanding costs, where they come from and how to save is very beneficial.

Closing costs for a mortgage are fees and expenses that borrowers must pay when they close on a mortgage loan. These costs typically include fees for services such as appraisals, title searches, credit reports and transfers taxes, HOA and loan origination if charged. Think of them as third party fees that go toward the cost of obtaining your home and/or loan. Many of these fees are necessary even with a cash purchase. Typically Section A - Loan Origination fees will be the only variable lender to lender and a great way to compare apples to apples when shopping. Section A costs can start at $0 and vary by lender and loan strategy. Most other fees will end up aligning in the end because they are related to the specifics of the contract and not controlled by the lender.

Prepaids for a mortgage loan are expenses that borrowers must pay in advance at the time of closing. Unlike closing costs, these are typically reoccurring fees. These expenses are related to the ongoing costs of owning a home and are paid up-front to ensure that there are sufficient funds to cover these costs at the time of purchase and when they reoccur. Prepaids may include:

1. Property taxes.

2. Homeowners insurance.

3. Mortgage insurance.

4. Prepaid interest.

A down payment for a mortgage is a payment made by the borrower toward the purchase price of a home. It is typically expressed as a percentage of the total purchase price and is paid up-front at the time of closing. The down payment is a way for the borrower to demonstrate their commitment to the purchase and to reduce the lender's risk.

The amount of the down payment required can vary depending on the type of loan and the lender's requirements. In general, conventional loans require a down payment of at least 3% for first time buyers and 5% to 20% of the purchase price in other circumstances, while government-backed loans such as FHA loans may require a down payment of as little as 3.5%. USDA and VA are both 0% down programs, although higher down payments can always be made.

A full review and understanding of costs is an important part of a complete pre-approval. Understanding what will be required, when and what the variables will be allows you to be fully prepared when you are ready to close on your purchase or refinance. Your Mortgage Advisor should take the time up-front before you shop, again when you have committed to a rate and loan strategy and lastly with your final closing disclosure to review these key details.

Alysha Boles is a Mortgage Loan Advisor and Debt Strategist that specializes in both the planning, pre-approval and loan process of mortgage lending. Licensed in California and Texas and the ability to connect you with a licensed professional in all 50 states. She can be reached at (661) 858-7214, or inquire online at http://www.advisoralysha.com.