Budgeting for Upfront Mortgage Costs

Woman looking at phone and paperwork

By Ted Lyons, Brighton Branch manager

When it comes to the funds needed to close on a home purchase, generally everyone knows one of the biggest components – the down payment. But when contemplating a home purchase it is important to remember that there are other funds needed as well including:

  • Reimbursing the seller for property taxes paid in advance
  • Setting up an escrow account for future taxes
  • The first year’s home owner’s insurance premium, which is collected at the closing
  • Setting up an escrow account for future insurance premiums
  • Costs (appraisal, title closing fee, title insurance, and county recording charges, etc.)

To estimate the amount needed so that you can prepare yourself in advance for how much everything adds up to, this equation can come in handy:

Down payment + a year’s worth of property taxes + 1,200 (insurance) + 3,000 (costs) = total amount needed to close.

With the exception of very large or very small purchases, this equation will give you a solid ballpark estimate of the total amount you’ll need to close.

Now that you’ve got a good working estimate, if you don’t already have that amount saved, you’ll want to map out a strategy for pulling those funds together in advance of your home search. The last thing in the world you want is to fall in love with the home of your dreams, only to be in the position where you don’t have the money needed to close.

If you have a projected time frame you’d like to make your home purchase, a simple way to save is to divide the funds you’ll need by the number of months left between now and then. That way you’ll know the amount you need to save each month to hit your goal.

Other resources that can be utilized for the funds to close are retirement accounts (IRA, 401k, 403b, etc.) and gifts from relatives or employers (not friends). One important note – funds from unsecured loans (signature loans, etc.) are not able to be used for the funds to close.

Knowing the total amount you need to close – not just the down payment – is an important part of the home buying process. Setting yourself up for success will put you in position to make a winning offer on the home you want to buy when the time is right. Michigan First Mortgage has a team of experienced loan originators who are ready to partner with you in buying the home of your dreams – so give us a call at 877.312.9033 or submit a contact form on our website here.