In a housing market where prices seem to be constantly on the rise, combined with Southern California’s well-known top-dollar real estate price tags, local buyers can find themselves wondering exactly how much money they need on hand to invest in the home of their dreams. When you combine the considerations of a down payment, the spectrum of closing costs, and other assorted cash requirements, the amount of money a buyer needs to have on hand to purchase a house adds up to more than a simple sum. Let’s take a look at the costs, what they pay for, and how much you can expect to invest in your new home.
Down Payment Amount
Your down payment can range from $0 dollars (for VA loans) up to 20% of the total cost or more. Lenders determine your risk as a borrower in part by the amount of your down payment. Typically, loans with higher down payments and lower loan to value (LTV) ratios come with lower interest rates. Some people assume that because of that, they must wait to buy until they have 20% down. However, if interest rates rise in the meantime, saving more before buying may not actually save you money in the long run. Working with an experienced Realtor with great lender relationships can help you determine the right course of action, the range of buyer assistance programs available, and the right down payment percentage to opt for based on your needs.
According to a survey conducted by ClosingCorp, over half of all homebuyers are surprised by the closing costs required to obtain their mortgage.
After surveying 1,000 first-time and repeat homebuyers, the results revealed that 17% of homebuyers were surprised that closing costs were required at all, while another 35% were stunned by how much higher the fees were than expected. Homebuyers reported being most surprised by mortgage insurance, followed by bank fees and points, taxes, title insurance and appraisal fees.
Bankrate.com gathered closing cost data from lenders in every state and Washington, D.C. in order to share the average costs in each state. The map below was created using the closing costs on a $200,000 mortgage with a 20% down payment.
Lender Required Cash Reserves
Sometimes a lender-required cash reserve requirement can take buyers by surprise. While it’s not technically a “closing expense,” lenders may expect you to have a certain amount of money held in reserve in your savings beyond the down payment and closing costs. They want to see this so they know that you have enough cash to make your mortgage payment during the first few months. A typical requirement is around two months, but it can vary. Remember, this is not an actual deposit– the lender only needs to be able to verify that your cash is available in a liquid form.
Perspective From A Local Lender
Jason Thibodeau, Mortgage Advisor at Alpine Mortgage Planning offers this advice regarding the total upfront costs of buying a home, “When it comes to down payment, the good news is it really doesn’t take as much as you might think to buy a home. Most consumers believe that you need that magic 20% down figure, but in reality the average down payment according to NAR for a first-time homebuyer is 6%. The other compelling reason to buy a home sooner rather than later is the fact that historically low rates won’t be around forever.”
Additionally, there are always different options for rates and fees. If you choose a rate that’s slightly higher than the prevailing interest rate, the lender may offer you a credit for a portion of the closing costs. Or if you want a mortgage rate that’s lower than the prevailing rate, you may choose to pay a “point,” which is 1% of the mortgage amount. The benefit of working with an experienced team of Realtors and mortgage advisors, is that they can help you find the right financial fit for your needs on an individual basis.
An Example Scenario of Down Payment & Closing Costs
Let’s consider that you did decide to put 20% down on a home priced at $580,000 — the median price in Los Angeles County right now. Given that scenario, your down payment would be $116,000 with closing costs adding up to about another $10,000, for a combined out of pocket cost of about $126,000. Below is an example worksheet showing you some typical costs, but keep in mind that interest rates fluctuate, lenders’ charges vary, and you yourself will have multiple options regarding how to structure the costs.
As with any financial transaction, everything will need the experienced eye of a professional to direct you on the right path. The good news? We’re here to help! Just contact us below and together we can map out a plan to finding and buying the home of your dreams!