The real estate industry has done a great job letting buyers know that they’ll need some cash when the buy a home. Typically, it’s the down payment that gets discussed; seldom do closing costs get brought up, and they can be a major surprise for homeowners.
Here are the cash outlays you’ll need to consider when you buy a Southern Maryland home.
Earnest Money Deposit
You’ve found the house you want to buy, and your agent has structured the perfect purchase agreement. In that agreement, you’ll find a section that deals with your earnest money deposit (EMD). Your agent will list the amount you’re paying and where the money will be held.
What is this? An earnest money deposit has several functions. First, it shows the seller that you’re serious about pursuing the purchase. After all, he or she is going to take the home off the market. The seller is taking a gamble by taking the home off the market, and you put your cash on the line with the possibility of losing it, under certain circumstances.
The amount of your EMD varies according to several factors, including the type of market you’re in. In fast-moving markets, a larger-than-normal EMD might entice the seller to choose your offer over others.
Typically, the earnest money deposit is 1 to 2 percent of the offering price. In May of this year, the median home price in the U.S. was $345,800, which would mean an earnest money deposit between $3,458 and $6,916.
After the seller accepts your offer, your lender will ask that you wire them your down payment funds.
Down payments are expressed as a percentage of the purchase price of the home. For example, using our national average home price, you will need $69,160 for a 20 percent down payment, $34,580 for a 10 percent down payment, $17,290 if you are required to come up with a 5 percent down payment, and $12,103 for a 3.5 percent down payment.
The percentage of your down payment will depend upon the loan you’ll be getting. Conventional loans generally require 20 percent down, and are the best choice if you hope to avoid paying a monthly private insurance premium (PMI).
Other loans, such as those through FHA or Fannie Mae, require significantly less for the down payment, while the VA and USDA require no money down.
These are the costs that catch far too many Southern Maryland homebuyers by surprise. Closing costs are all the fees required of everyone who helps you purchase the home. From your real estate agent’s commission and appraiser’s fee to the title company’s research and issuance of a policy and, of course, the lender’s fees. These fees add up, so it’s important to compare closing cost estimates from several lenders. It’s also important to understand which costs are negotiable.
It’s not unusual for closing costs to amount to 2 to 5 percent of the loan amount. Using our average home price mentioned above, with a 3.5 percent down payment, the loan amount will be about $333,697. Closing costs would be anywhere from $6,674 to $16,685. As you can see, closing costs, if they’re not prepared to pay, can come as quite a shock to homebuyers.
3 Ways to Reduce Closing Costs
Timing: You can reduce a portion of your closing costs by closing as late in the month as possible. Lenders charge interest in arrears, meaning that when you make a house payment, you are actually paying for last month’s interest (and the coming month’s principal). When you close escrow, the lender will have calculated how much interest you owe from the date your loan was funded to the end of the current month.
For example, if you close on your new home on August 15, you’ll pre-pay the interest due from August 15 until August 31. September’s interest isn’t due until October 1, when you will make your first house payment.
Reduce the pre-paid interest charge by closing at the end of the month.
Seller help: You can eliminate the need to pay all or part of your closing costs by requesting that the seller contribute. The seller gets to write that amount off as a tax deduction, and you get to skip the closing costs, so it’s beneficial to all parties.
Include in loan: Ask your lender if you can include the closing costs in your loan. Yes, there will be a charge for this, but it won’t be nearly as large as the immediate outlay of cash necessary to pay closing costs.
Despite what many first-time homebuyers think, the down payment isn’t everything when it comes to cash outlays when you purchase a Southern Maryland home. It’s important to determine exactly how much cash you’ll need to purchase a home so that you can budget for these expenses.
Leonardtown MD Homes for Sale and Real Estate Services in Southern Maryland. You now have a search engine to help you with your Southern Maryland home search! And I’m ready to provide you with a custom home valuation if you’re considering selling your home. Let’s connect to discuss how I can help you. Contact Kimberly Bean at 301-440-1309
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