Mortgage Rate: the cost of your borrowed money. It is the most expensive cost of buying a home, since most of the interest costs for a thirty year mortgage are paid in the first ten years of owning. On a 6% loan, only 17% of the principal has been paid during the first ten years. Also, the higher the loan rate, the longer it takes to pay off principal. The thirty year interest cost of a 6.50% loan, compared with a 6% loan is $29,520! The average monthly difference between the two rates is $88.
Down payment: all mortgage programs are keyed off of the down payment amount. The three most common mortgage programs, regardless of which lender is making the loan, are: 3% (FHA,) 5%, and 20% down (both ‘conventional’ loans.) These three loan programs each comes with a host of related lending provisions that key off the down payment amount. Conventional programs with less than 20% down require private mortgage insurance. Lenders charge various origination fees, and different interest rates, based on the down payment amount.
Other mortgage terms and fees: this is where the differences between different lenders, and different lending programs, is most noticeable. How long the loan schedule is (30 years is standard,) what other ‘fees’ the lender charges, and what the actual interest rate is on the loan, can get very complicated.
Seller credits: in a buyer’s market, or, when a seller is anxious to sell the property, there is room for the buyer to ask the seller for credits (concessions.) Basically, this means that whatever the buyer is paying for a home, can be offset by how much cash the buyer has bring to the closing table. Some or all of the basic buyer closing costs, which include the down payment amount, non-mortgage related closing costs, and the earnest money, can possibly be covered by the seller’s own closing cost funds, or by adding the costs to the loan amount.
Enhanced seller assistance programs: in some lending programs, the federal rule that requires that seller credits in the deal cannot exceed 6% of the purchase price, might be exceeded. A non-for-profit agency can ’convert’ the seller’s contribution to the buyer’s closing costs. In turn, the agency rebates the seller’s credit funds to the buyer. In cases like this, the program can literally pay for all of the buyer’s cash closing costs. These programs are scheduled to end 10/31/2008.
Buyer-seller negotiation: most people think that the major issue that separates a buyer and a seller is the price of the home. In fact, the price paid can be ’adjusted’ by the amount of seller credits that are offered. So the negotiation between the two parties includes both price and terms.