Thursday, January 20, 2011

Taking the Bite Out of Closing Costs

Excerpt from Taking the Bite Out of Closing Costs
By Jack Guttentag, Inman News

Upfront cash requirements are the single most important impediment to homeownership. First and foremost, cash is required for the down payment, which lenders insist on to protect themselves.

The down payment is a buffer against loss in the event the borrower defaults. It is also a rough indicator of the borrower's financial discipline, in the sense that those able to save enough for a down payment will default less frequently than those who can't.

With Chuck Freedenberg, I designed a simple calculator for determining the option that was least costly to the borrower. It is number 14a on my website.

The calculator indicates that although the lender contribution in my example above increased the payment by more than the equivalent seller contribution, it was not necessarily the less costly option because account must be taken of differences in the loan balance and in tax savings.

In general, a lender contribution is the better option for a borrower with a short time horizon and in a high tax bracket. With a lender contribution, the break-even period for a borrower in the 25 percent tax bracket is about five years, rising to six years if he is in the 40 percent bracket.

Borrowers who expect to have the mortgage longer do better with a seller contribution. But don't rely on these generalizations. The calculator allows you to tailor the answer to the specifics of your situation.

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