Calculating Monthly Mortgage Payment
This BLOG On Calculating Monthly Mortgage Payment Was Written By Gustan Cho
Many first time home buyers think that they need a lot of money to purchase a home. When they see that homes average $200,000, they think that they could never afford a home and do not pursue on thinking about. However, the fact of the matter is that you do not need much money to purchase a and your new mortgage payment may not be that much more than your current rent payments.
On any home purchase transaction, there are two types of costs required:
- The down payment on the home purchase
- Closing costs for the home purchase
Minimum Down Payments Differ Depending On Loan Program And How It Affects Calculating Monthly Mortgage Payment
How Calculating Monthly Mortgage Payment Depends On The Down Payment
Depending on the mortgage loan program you go with, there are minimum down payment requirements on a home purchase. Here are the down payment requirements on a home purchase depending on the particular loan program you decide to go with:
- FHA Loans require a minimum of 3.5% down payment on home purchase
- Conventional loans require 3% from first-time buyers as well as those who have owned a home within the last three years, and 5% otherwise
- The down payment is required by all mortgage lenders and can be gifted 100% by a relative (with FHA loans) as long as the donor of the gift can sign a gift letter that states that the down payment is a gift and is not a loan and therefore does not need to be paid back
- With conventional loans, part of the down payment can be gifted
- VA loans and USDA loans do not require any down payment and offer 100% financing
- There are closing costs on all mortgage transactions. Home buyers do not have to pay the closing costs if they can get a seller’s concession and/or lender credit to cover the closing costs of their home purchase
- Fannie Mae and Freddie Mac allows up to 3% sellers concessions on primary and second homes and 2% sellers concessions on investment properties
- Home buyers will need the down payment and closing costs to purchase a home. As noted above, the down payment is mandatory and it can be gifted
- Closing costs come with every home purchase and are any costs that are incurred in closing your home purchase
- These costs include title charges, attorney’s fees, appraisal costs, one year of your homeowner’s insurance premium, origination costs, and pre-paids (which are two months of escrow reserves, required by your lender, of homeowners insurance and property taxes), among others
- Most home buyers only can come up with the down payment and not a penny more, which is fine
- Closing costs can be covered either by a seller’s concession that covers most or all of the closing costs and/or a lender credit where the mortgage lender issues a credit towards part or all of your closing costs in lieu of accepting a higher mortgage interest rate
- An experienced real estate agent will always ask for a seller’s concession for home buyers
- FHA permits up to 6% in seller’s concessions from the home sellers and conventional loans will allow up to 3% of seller’s concessions towards closing costs for owner occupied properties and 2% sellers concessions for investment properties
- You can use seller’s concessions to cover all of your closing costs but not put it towards your down payment
- Seller’s concessions overages cannot be given to the home buyer in the form of cash, and overages must be given back to the home seller
- However, if a loan officer discovers that there is an overage in seller’s concession, then the loan officer can use it to buy down the mortgage rate by buying points with the overage
- If the home buyer is short of closing costs because they did not get enough seller’s concessions, closing costs can be covered by a lender credit
Case Scenario On A Home Purchase And Calculating Monthly Mortgage Payment
For example, we will take a case scenario on a home purchase where a home buyer is buying a home for $200,000 single family home:
- The down payment required is 3.5% of the $200,000 purchase price which is $7,000
- Closing costs are $7,,000 but the home buyer only has a $3,000 seller’s concession towards the closing costs
- The home buyer has only $7,000 and not a penny more, so where are they going to come up with the shortage of closing costs which is $4,500?
The answer to this is a lender credit. If the borrower was quoted a mortgage interest rate of 3.75% for a 30-year fixed-rate FHA loan, the borrower can choose a higher mortgage rate and get that extra $4,500 from the mortgage lender. Maybe the rate becomes 4.5% for the $4,500 in lender credit
The borrower then can choose to lock their mortgage rate at 4.5%, get a $4,500 lender credit and avoid covering closing costs out-of-pocket.
Property Tax Prorations: Illinois Home Purchase
There are times where a home buyer can purchase a home without any money out-of-pocket. There are cases where home buyers can get money back at closing due to property tax prorations. In Illinois, property taxes are paid in arrears and the home seller owes the home buyer one year’s property tax credits. These are called property tax prorations. Home buyers in Illinois can apply property tax prorations towards their down payment. Here is a case scenario where the home buyer will not need to come up with any money out of pocket and/or get cash back at closing:
- Buyer has only $7,000 to use for down payment on $200,000 home purchase
- Down payment required on a $200,000 FHA Loan is 3.5% or $7,000
- Closing costs are $5,000 and buyer has a $5,000 sellers concession for $5,000 so the closing costs are covered and the only thing the home buyer needs to worry about it the down payment
- Buyer has given $1,000 earnest money for his home purchase which will be applied towards down payment
- Annual property taxes are $8,000
- Buyer will get $8,000 in property tax proration credits which can be used towards down payment
- Down payment required on $200,000 home purchase is $7,000 but the buyer will get the $1,000 earnest money applied towards down payment and $8,000 in property tax prorations.
- Buyer will get $2,000 at closing and get keys to their new home
The above case scenario is just an example, and it may not happen often, but there are times where home buyers either need little to no money or sometimes will get money back at their home closing as a result of Illinois’ property tax prorations.
Calculating Monthly Mortgage Payment is not too difficult once you have all of the data such as property tax and homeowners insurance information. If you are a home buyer and have any questions on how much your mortgage payments will be on your new home purchase, please do not hesitate to contact Gustan Cho at 262-878-1965 or text Gustan Cho on his cell at 262-716-8151 for faster response.