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The Best Use For Your Money
It takes dedication and discipline to save for a down payment.
Once potential buyers accumulated those precious dollars, they will want to allocate every dime to their best advantage. Surprisingly, that may mean diverting some cash to other purposes.
Consider: The lower a borrower’s credit score, the higher the interest rate on the mortgage. Even a quarter of a percentage point higher in rate can translate to $100 or more monthly.
And, anytime a borrower makes a down payment less than 20 percent of the purchase price, he’ll be charged mortgage insurance, usually tacked onto the monthly payment. The smaller the down payment, the higher the charge.
Keith Gumbinger of mortgage data site HSH.com illustrates: Someone buying a $100,000 home, making a 10-percent down payment ($10,000) and getting a 4-percent mortgage would pay $429.68 in mortgage principal and interest, plus $45.75 monthly for mortgage insurance. If the same buyer put down 5 percent, the mortgage insurance charge would be $72.84 monthly, and mortgage charges would be $453.55.
Maybe someone who has a high balance on a couple of credit cards, explains Doug Robinson, spokesman for the housing nonprofit NeighborWorks.
Since high credit card balances are a drag on credit scores, and mortgage charges rise for lower scores, paying down cards could be the most advantageous route. Experts say lenders should help borrowers run various scenarios (Gumbinger points borrowers to the mortgage calculator on his site, HSH.com).
Moreover, says Robinson, many homes have costly surprises, and it’s prudent to keep some money in a savings, and not use all for the purchase.
Finally, closing costs – fees for parts of the purchase transaction like the title search – might be picked up by the seller, but buyers should plan for these fees in the pre-purchase fund.
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