Question 1

What is cash to close on a mortgage?

Accepted Answer

Cash to close is the total amount of money you need to bring on closing day to finalize your home purchase. It includes your down payment, closing costs (origination fees, title insurance, appraisal), prepaids and escrow deposits (homeowners insurance premium, prepaid interest, initial property tax escrow), and any discount points you choose to buy down your rate. It does not include your monthly mortgage payment, which begins after closing.

Question 2

How much down payment do I need to avoid PMI?

Accepted Answer

You typically need a down payment of at least 20% of the purchase price to avoid private mortgage insurance (PMI). For example, on a $500,000 home, that means $100,000 down. If you put down less than 20%, lenders require PMI to protect against default risk. PMI rates vary by loan-to-value ratio (LTV) and credit score — ranging from about 0.3% to 1.2% of the loan amount per year. PMI is usually removed automatically once your LTV drops below 78%.

Question 3

How does my credit score affect my mortgage rate?

Accepted Answer

Your credit score directly impacts your mortgage interest rate through Loan-Level Price Adjustments (LLPAs), which are risk-based fees set by Fannie Mae and Freddie Mac. A score of 780+ typically gets the best rates with no adjustment. Scores between 720-779 may see a 0.125-0.375% rate increase. Below 700, adjustments can add 0.5% to 1.5% or more to your base rate. A lower credit score also increases PMI premiums. For co-borrowers, lenders use the lower of the two scores.

Question 4

What is included in a monthly mortgage payment (PITI)?

Accepted Answer

PITI stands for Principal, Interest, Taxes, and Insurance — the four core components of a monthly mortgage payment. Principal reduces your loan balance. Interest is the cost of borrowing. Taxes are your property tax (often escrowed monthly). Insurance is your homeowners insurance premium. Beyond PITI, your total housing cost may also include HOA or condo assessment fees, private mortgage insurance (PMI) if your down payment is below 20%, and optionally a home warranty.

Question 5

What housing-to-income ratio is considered safe?

Accepted Answer

Financial advisors generally recommend keeping your total housing cost at or below 25-28% of your gross monthly income for a conservative budget. The traditional lending guideline allows up to 28-30%. Anything between 30-33.75% is considered stretching your budget and may leave less room for savings and emergencies. Most lenders consider ratios above 33.75% a hard stop for conventional loan qualification, though some programs allow higher ratios with compensating factors.

Question 6

How do closing costs affect how much cash I need?

Accepted Answer

Closing costs typically add 2-5% of the purchase price on top of your down payment. On a $500,000 home, that could be $10,000-$25,000 in additional cash needed at closing. Common closing costs include loan origination fees (0.5-1% of the loan), appraisal ($400-$700), title insurance ($1,000-$3,000), recording fees, and attorney fees. You'll also need prepaids and escrow deposits, which typically include 2-6 months of property taxes, 1 year of homeowners insurance, and prepaid daily interest.

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