The Loan Lowdown – Downpayment vs Closing Costs
Jim and Jane are back at it again. Today we are talking about something that everyone wants to know, but is afraid to ask, “What’s my down payment and what are the closing costs”. Jim gets customers all the time asking what their down payment is, but in truth they want to know if there are any closing costs, and what amount of money do they need to come to the table with. Every time someone asks “what’s my down payment” Jim answers back with “your down payment is $10K but you really want to know the total amount of cash to close”, which includes more than your down payment, and it can vary.
It’s kind of a loaded question, so Jim made a list of a few things that could affect your closing costs; some are minor, and some are major.
1) Buying a house in a trust: If you are buying the house in “trust,” the trust will need to be reviewed and prepared, and there are fees that are needed. A PO (Power of Attorney) needs to look at the documents, and it has to be recorded. So, for example, you have 2 buyers, and at the very last minute, one of the buyers and one person can’t show up to the closing. Now there are additional closing costs as you are going through the transaction.
2) If there is an HOA (Homeowners Association), sometimes there are setup fees and moving-in/moving-out fees
3) Transfer stamps can be significant costs in Illinois. Every city is different, and the amount is different. Some cities may not have transfer stamps and may just require a home inspection; some need a home inspection and transfer stamp. Some are split between buyers and sellers.
4) Condo Fees/Questionnaire: We could possibly need a condo questionnaire, and those can cost money.
5) New Construction: New construction contracts—sometimes they are paying their normal seller closing costs for title, and sometimes the contract says you are not paying anything at all. Without us having the contract, we really wouldn’t know.
6) Paying points and real estate commissions. Sometimes the real estate fees go into the closing costs. If you are working with an agent that goes over the top and explains this, and they go to the seller to get the commission, there usually is not a problem. But there are times when we have had buyers be surprised that they are paying any form of real estate commission.
We don’t know any of this until we get the “Buyer’s Agreement.” We want to prepare everybody, so you know, so it all goes to the underwriter.
7) Indiana vs. Illinois:
Illinois was $7,388 for closing costs, and Indiana was $3,771 for closing costs (title fees, lender fees, appraisal fees, credit reports, and recording fees, and it doesn’t include transfer stamps) unless you were getting a discount for some reason. Illinois uses attorneys, and the title fees are more expensive.
8) Misconception that the down payment is the closing costs. But that is not true. There are down payments, closing costs, prepaid and reserves. Prepaid items are a year’s worth of homeowners insurance and daily interest (the remaining days of the month that you are closing in), i.e., if you are closing on the last day of the month, there will be only (1) day of daily interest. If you are closing on the 1st of the month, there could be 30/31 days of interest. “Reserves” are your escrow setup for your taxes and insurance.
The seller can contribute to a lot of this, except for the down payment, and different loans have different down payments. Increasing your down payment does not change your closing costs. Closing costs are a fixed cost, i.e., if you were buying a $1 million dollar home, or a $250K home, the closing costs would are the same, accept for taxes, insurance, etc.
9) Earnest Money: What is earnest money? Earnest money is a deposit made by a homebuyer to a seller to show they are serious about purchasing a property. This “good faith” deposit, typically 1% to 3% of the purchase price, is held in an escrow account and is credited toward the down payment and closing costs at closing. It comes off the total at the time of closing.
10) Downpayment is taking off equity from your home. You are taking away principal. I.e., if you are putting down $20K, then it is $20K less than what you are actually borrowing. If you are taking money from an annuity, 401(k), or any type of retirement plan, typically you can pull it out for the purchase of a home, down payment, or closing costs, and they just want to see a document that states the amount of money that is.
There are different things that can affect your closing costs, i.e., state, taxes, etc. It’s important to know that you are not only saving for your down payment, but you are also saving for your closing costs. You may be able to negotiate these costs into your overall expenses. But we estimate high when we begin the process, and they get equaled out when it comes time to close on the closing day. It’s our job to let you know what everyone is going to charge you, and we all do our best at guessing. Guessing high prepares you, and always it is less, so if you can think that way. You can call us, and we can walk you through it and make things easier. If you find a house, we will look at taxes, transfer stamps, etc. It’s all about transparency, and we always want to be transparent. We want to get you prepared so you have an idea and know what to expect.
Please know that taxes in Indiana and Illinois are both paid in the rear, meaning they are paid the next year. So you do get a seller tax credit that can help offset a lot of the number. And when we speak to our clients, we go over all of that in detail, including tax credits. But you are not allowed to give yourself that tax credit until you are actually at the closing.
Give us a call if you have any questions.
—
House in a trust:
Having a house in a trust means you have transferred legal ownership of the property to a trust you have created, often naming yourself as the trustee for control during your lifetime. This allows you to designate a successor trustee to manage and distribute the property to beneficiaries according to your instructions after your death, typically avoiding the lengthy and public probate process.
Trust POA (Power of Attorney):
A “POA trust” is not a standard legal term, but likely refers to how a Power of Attorney (POA) and a trust work together, or the confusion between the two. A POA agent manages a person’s assets in their name, while a trustee manages assets held within the trust. A well-rounded estate plan often includes both a POA and a trust to cover all financial matters, with the POA handling assets outside the trust and the trustee managing assets inside it.
HOA (Homeowners Association):
An HOA, or Homeowners Association, is a private organization that creates and enforces rules for a residential community to maintain standards and property values. Residents typically pay monthly fees to fund shared amenities, like landscaping or a pool, and are subject to the HOA’s governing documents, which can include restrictions on things like home exterior modifications.
Transfer Stamps (Illinois):
In Illinois, transfer stamps (formally known as Real Estate Transfer Taxes) are revenue stamps that must be purchased as evidence of payment of a tax imposed on the privilege of transferring real estate title or a beneficial interest in real property. These taxes can be levied at three levels: state, county, and local municipality.
Paying Points on a Mortgage: Paying points on a mortgage is a way to pay an upfront fee to lower your interest rate and monthly payments. One point typically costs (1\%) of the loan amount and can lower the interest rate by about (0.25\%). Whether it’s a smart financial decision depends on how long you plan to stay in the home, as you need to stay long enough for the total savings to outweigh the upfront cost. Points may also be deductible on your taxes under certain conditions.
Earnest Money: Earnest money is a deposit made by a homebuyer to a seller to show they are serious about purchasing a property. This “good faith” deposit, typically 1% to 3% of the purchase price, is held in an escrow account and is credited toward the down payment and closing costs at closing. If the sale is completed, it goes toward the buyer’s total costs, but if the buyer backs out for reasons not covered by the contract’s contingencies, the seller can keep the money.
