Down Payment vs. Closing Costs

Many people don’t realize that the down payment of a house is different than closing costs.  The down payment of a house is basically used as collateral when buying a house.  The lender that is processing the loan uses the down payment to secure the risk of the loan.  If the loan defaults, then the lender is legally entitled to repossess the house and sell it in order to repay the remaining balance on the loan.  The down payment amount is dependent on the type of loan you use to buy the house (FHA, or Conventional).  Generally, down payments range from 3.5% to 20%: for an FHA loan, the standard down payment is 3.5%; for a Conventional loan, you usually have to pay at least 5-10%; and for investment properties, or second homes, the lenders mostly require 20%.  Naturally, you may put more than the minimum required down payment which will lower your monthly payments.

         Closing costs is what pays for all the little things that have to be done in order to buy your home, like county recording fees, appraisals, paying the title or escrow company, the lender, and so forth. These “COSTS” will add up to between 2-4% of the purchase price.  It is important to understand the ways that closing costs can be paid. The basic way of paying for them is straight out of your bank account just like when you pay your down payment.  You can also negotiate with the seller of the house to pay for closing costs which is the most popular way in this market.  Another way is to raise the interest rate a 1/4% and most lenders will then waive the closing costs in order to make that extra interest over the life of your loan.  Also, many states have programs that will help you pay for ALL of the down payment and closing costs.  If you have any questions about the process of purchasing a house, don’t hesitate to give me a call!