Here are the settlement charges for the new mortgage on House#2.
|801||Origination Fee (2.4%)||$ 1,356.25|
|802||Lender Credit for the interest rate||$ (1,406.25)|
|804||Appraisal Fee||$ 350.00|
|901||Mortgage Interest||$ 8.86|
|903||Hazard Insurance Premium 1 yr||$ 456.19|
|1002||Hazard Insurance Reserves 3mo||$ 114.06|
|1004||County Tax Reserves 5mo||$ 584.65|
|1008||Aggregate Adjustment||$ (152.08)|
|1102||Settlement Fee||$ 493.50|
|1103||Owner’s Title Insurance||$ 624.00|
|1104||Lender’s Title Insurance||$ 394.00|
|1201||Recording Fee||$ 25.00|
|1304||HOA Advance 2mo||$ 112.00|
|Total Closing Fees||$ 2,960.18|
|Seller Contribution to closing costs (2%)||$ (1,500.00)|
|Owner’s Title Policy paid by seller||$ (624.00)|
|County Tax adjustment||$ (691.97)|
|Total Due From Borrower||$ 144.21|
So in the end, I only paid my down payment + $144.21 in overall closing costs. Not too shabby!
There are essentially two ways that I reduced the amount of cash I had to bring to the closing table:
- Negative points – Also called a Lender’s Credit on the HUD statement (line 802). This basically means I chose a higher interest rate in exchange for a lender rebate.
- Seller contribution to buyers’ closing costs – This is a set dollar amount or a % of the purchase price that a seller agrees to pay towards your closing costs. The maximum allowable contributions will be based upon the type of financing you obtain, the property type, and the down payment amount. For an investment property, the maximum that you can request is 2% of the purchase price regardless of the down payment.
Both of these options fall under the “Pay less now, or pay more later” mantra. I chose both of these options very mindfully, and it made sense for my situation (a short-term investment property). Remember, there isn’t a “one size fits all” option when it comes to mortgage shopping. For example, on House#1, I chose a no-points loan, and I opted for a lower purchase price instead of a seller contribution to closing costs.
The Beauty of Leveraging
It really wasn’t until I bought this house, that I truly understood the benefit of leveraging your equity with a mortgage. (For those that don’t know, leverage is essentially the use of borrowed funds to complete a transaction.) Suppose I had chosen NOT to finance my purchase with a loan, but instead paid for the house entirely with cash. There would have been two major consequences:
- I would have paid more in closing costs, since I wouldn’t be able to receive either the lender credit or seller’s contribution to closing costs.
- All my money would be tied up in one property, and I wouldn’t be able to spread it out on multiple investments like I can now.
Now, I’m not advising everyone to go out and borrow as much money as possible. In fact, I’ve always been HUGELY against debt of any kind. My mortgage on House#1 last year was the VERY FIRST time I took out a loan, and the very first time I ever went into debt. I always pay my credit cards in full each month; I’ve never had car payments; and I’m proud to say that I covered the entire cost of my education through lots and lots of scholarships and part-time jobs, so no need to go into debt there.
So, no, I’m not saying to just borrow against your house, and spend willy-nilly. That’s not leveraging. That’s overconsumption. You don’t want to ask me what I think about all the people who did a cash-out refinance or home equity loan to finance their shiny new car back during the real estate boom, and have now walked from their home. Boy, will that get my blood boiling. I’m just saying that there is some value to taking a mortgage (and thus leveraging the value of your home) so that you can use your cash to purchase assets that make additional income. I used to think all debt was BAD, so it’s interesting to see my mindset change on this.