Buying a home is one of the most important and expensive decisions most consumers will ever make. Although mortgage rates and housing prices are significant components of affordability, there are other upfront costs homebuyers must be aware of.
A considerable portion of a home savings nest egg should be devoted to the down payment, but closing costs like taxes, home inspection fees, and insurance all must be paid upfront.
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Closing costs can add up to tens of thousands of dollars, putting homebuyers who haven’t planned for the added cost in a financial bind.
Though it’s possible to cover closing costs with loans, the interest can snowball quickly, adding another monthly payment to the list.
Dave Ramsey outlines how closing costs can quickly put buyers into debt, and how the added expenses can derail the mortgage approval process, making it more difficult to make mortgage payments.
Rising home prices and mortgage rates have increased the cost of homeownership in recent years. Ensuring you have enough saved to cover the down payment and closing costs can help save money in the long run.
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Dave Ramsey highlights why homebuying savings must factor in closing costs
Closing costs include loan, appraisal, inspection, insurance, property taxes, and legal fees.Â
Freddie Mac estimates that average closing costs range between 2% and 5% of the home price. For the median U.S. home priced at $403,700, that amounts to a staggering $20,185.
Those using a loan to pay for closing costs will find themselves in five figures of debt on top of the home they have just committed to paying off for decades. Â As household debt continues to rise with the cost of living, mounting monthly costs and late payments can eventually put your home at risk of foreclosure.
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Ramsey explains why having enough savings to cover closing costs is crucial to starting homeownership on the right foot.Â
“Why is it so important to have enough cash saved up to cover closing costs? Because you donât want to take on any extra debt at the end of the buying process,” he said.Â
Many buyers don’t consider the full cost of buying a home, relying on loans and credit to help bridge the financial gap, but digging themselves into a bigger financial hole in the process.
“Thatâs right â getting a second loan for closing costs is a big mistake. For starters, it adds an extra payment on top of your house payment. Talk about a recipe for financial stress!”
Dave Ramsey says accruing debt during the homebuying process can impact your mortgage loan
In addition to tacking on an extra monthly loan payment, taking out a loan to cover closing costs can derail the mortgage approval process.
Applying for a new line of credit temporarily decreases your credit score, and the change could prompt your mortgage lender to delay your loan approval.
Related: Morgan Stanley predicts major mortgage rate changes are coming soon
Ramsey explains how taking out a new loan could trigger a domino effect that could delay the closing process.
“Taking on extra debt while youâre closing changes your credit score, which sends your mortgage approval back to the drawing board and delays the closing process,” he continued.
Between the stress of taking on additional debt and delaying the closing process, paying for closing costs with a new loan may be more trouble than it’s worth. Ramsey recommends factoring closing costs into your savings fund to avoid any homebuying hiccups.Â
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