What’s Really in a Down Payment?
So let’s get the first thing straight: your down payment is not actually your down payment. This comes as a slap in the face with a brick, I know. Furthermore, these fees and expenses will accumulate into the thousands of dollars, with smaller fees and expenses usually being non-refundable. There is a small degree of risk associated with pursuing financial and personal freedom.
Not to despair, however, as you’ll see the fees are not unreasonable, and in some instances help you.
So What does my Down Payment go Towards?
First and foremost, your down payment goes towards:
- Fees associated with all the parties involved in generating and making your mortgage (you’ll often hear these referred to as closing costs)
- Services and inspections the home may/will need
- Finally, your down payment
Let’s cover each of these expenses and costs in depth:
Firsts thing’s first: you’ve got to pay the guys giving you the money. The lender and underwriter both have their fees: one to cover costs while writing the loan, known as origination fees, origination points, or processing fees, and the other to compensate the person evaluating you for the loan, known as underwriting fees. Origination points usually cost between .5%-1% of the loan amount, and are called points because they typically cost point zero one (.01), or one percent, of the loan amount. Origination points/fees can be negotiated, but usually end up being built into the loan if negotiated away, costing borrowers more in the long term. Underwriting fees generally range between $400-$1k. The good news is, you don’t pay either processing fees or underwriting fees until closing, so it’s not something you risk paying more than once, as you can’t pay them if you don’t close!
The next closing cost are discount points. These are optional, and reduce the interest rate for the life of the loan. Since they are points, they typically cost 1% of the loan amount, but only reduce the interest by .25%, a mere quarter of a percent. Why this is, I don’t know, but it’s kind of a fair deal when you consider that mere percents can save you thousands of dollars a year. Points can be split up into pieces as well, such as having half a discount point, which would cost .5% of the loan amount and reduce the loan by .125%. The decision to buy discount points depends on your financial position, as well as how long you plan on keeping the house.
There’s other people that need to be paid for securing your loan, however. Such as land surveyors (to make sure your land is where you think it is), appraisers, the title company, the government, and your home-insurance company!