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If you’re in the process of purchasing a home in Michigan, you’re likely to come across the term “closing costs.” These costs can be confusing, as they include a variety of fees and expenses associated with finalizing the sale of a property. Understanding what closing costs are and how they are calculated is essential for homebuyers in Michigan, as they can add up to thousands of dollars in additional expenses. In this blog post, we’ll explore closing costs in more detail and provide helpful insights from the Zac Folsom Group, a leading real estate agency in Kalamazoo, MI, that can help you navigate this crucial aspect of the home buying process.
What are Homebuying Closing Costs?
Home closing costs refer to the fees and expenses that you will need to pay at the time of closing when you purchase a property. These expenses can include loan origination fees, title insurance, appraisal fees, home inspection fees, attorney fees, and more. The total amount of home closing costs varies depending on several factors, such as the purchase price of the home and the type of loan you have.
While Jeff Foxworthy’s comparison of buying a house to getting married is humorous, it’s not entirely accurate when it comes to the fees associated with purchasing a home. While there are costs involved, they are not as outrageous as some people may think, and it’s possible to get a good estimate of them even from the beginning. With the right information and preparation, homebuyers can understand what fees to expect and plan accordingly. By working with a trusted real estate agent and lender, you can get a clearer picture of the costs involved in purchasing a home and avoid any unexpected surprises. But until you’re ready to sit down with us – let’s go through what to expect on your next purchase.
Down Payments (0%-100%)
When it comes to purchasing a home, the down payment is a crucial part of the process. It’s the initial sum of money that you pay upfront to secure the property, and it’s typically a percentage of the total purchase price. While some homebuyers may see it as an additional cost, it’s essential to understand that it’s actually a vital part of the closing costs. By putting money down, you’re showing the bank that you have a vested interest in the property and that you have the financial means to afford it.
The down payment is also a way to convince the bank that you can afford the house. By putting money down, you’re essentially reducing the amount of money you need to borrow, and therefore reducing your risk to the lender. The more money you can put down, the less risk the bank takes on, which may mean more favorable loan terms for you. In short, the down payment is a way to demonstrate financial responsibility and stability, which can make you a more attractive candidate for a loan.
Of course, there’s always the joke that 100% financing is paying cash for the house. By paying cash, you may be able to alleviate some of the other closing costs, such as the appraisal fee, title search fee, and prepaid taxes and insurance. However, this is not a feasible option for most homebuyers. For those who do need a loan, it’s essential to understand the importance of the down payment and to plan accordingly. By working with a trusted real estate agent and lender, you can get a better idea of what the down payment will be and how it fits into your overall financial plan. Ultimately, the down payment is a necessary part of the home buying process, but it doesn’t have to be a burden.
Prepaid interest is another cost that buyers need to consider when closing on a home with a mortgage. This is the interest that accrues on the mortgage from the date of closing to the end of the month. The amount of prepaid interest will depend on the size of the loan and the interest rate. Prepaid interest is typically included in the closing costs and is added to the mortgage principal.
It’s important to note that when closing on a home with a mortgage, buyers typically don’t have a mortgage payment for the month in which they close and the month after. This is because the prepaid interest covers the interest due for those two months. For example, if a buyer closes on a home on June 15th, they will not have a mortgage payment due for the months of June and July. Their first mortgage payment will be due on August 1st, which will include the principal, interest, taxes, and insurance.
In Michigan, if a homebuyer puts down less than 20% of the purchase price, they will typically be required to pay for private mortgage insurance (PMI). This insurance protects the lender in case the borrower defaults on their loan. While PMI can add to the cost of homeownership, it can also make it possible for buyers to purchase a home with a lower down payment.
The cost of PMI varies depending on the size of the down payment and the amount of the loan. It’s usually a percentage of the total loan amount and can be paid monthly or as a lump sum at closing. While it’s an additional expense, it’s important to remember that PMI can make homeownership more accessible to those who may not have the means to put down a large down payment.
It’s also worth noting that PMI is not permanent. Once the homeowner has paid down enough of their mortgage to reach the 20% equity threshold, they can typically request that the PMI be removed. This can result in significant savings over the life of the loan. Overall, while PMI can add to the cost of homeownership, it can also make it possible for buyers to achieve their goals of owning a home in Michigan.
One fee that buyers should be aware of is the funding fee. The funding fee is a fee that is charged by the lender and is typically a percentage of the loan amount. This fee is used to cover the costs of processing and closing the loan. It’s important to note that the funding fee is not the same as the down payment, as it’s a separate expense that is paid upfront or rolled into the loan.
The amount of the funding fee can vary depending on the type of loan and the size of the down payment. For example, if you’re a veteran and taking out a VA loan, the funding fee may be waived or reduced. On the other hand, if you’re taking out an FHA loan, the funding fee can be as high as 1.75% of the loan amount. It’s important to understand the funding fee requirements for your particular loan type and to budget accordingly.
While the funding fee is an additional cost, it’s important to remember that it’s a necessary expense for obtaining a mortgage. By working with a trusted lender and understanding the funding fee requirements, you can ensure that you’re making informed decisions throughout the home buying process.
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Mortgage Title Policy
When purchasing a home in Michigan, buyers will typically be required to pay for a mortgage title policy as part of the closing costs. This policy protects the lender in case there are any issues with the property’s title. It ensures that the lender has a valid lien on the property and that the buyer has the right to use and occupy the property. The cost of the mortgage title policy can vary depending on the size of the loan and the title insurance company.
In the Kalamazoo area, it’s common for sellers to pay for the owner’s title policy as part of the transaction. While the buyer will typically be responsible for the mortgage title policy, the owner’s policy is an additional expense that can provide added protection for the buyer. This policy protects the buyer against any title issues that may arise after the purchase, such as liens, encumbrances, or other claims against the property.
Overall, the mortgage title policy is a necessary expense when purchasing a home in Michigan. By working with a trusted real estate agent and lender, buyers can understand the costs associated with the mortgage title policy and plan accordingly.
Prepaid Taxes and Insurance
Prepaid taxes and insurance are a part of the closing costs when purchasing a home. These expenses are paid in advance and are typically placed in an escrow account by the lender. This ensures that the funds are available to pay the expenses when they come due.
Prepaid taxes are the property taxes that are due on the property for the year. The amount of prepaid taxes will vary depending on the time of year that the home is purchased. If the purchase is made in the middle of the year, the buyer will be responsible for paying the portion of the property taxes that have not yet been paid by the seller. This amount is then placed in the escrow account and is used to pay the property taxes when they come due.
Prepaid insurance is the homeowner’s insurance policy that is paid in advance for the first year. This policy provides protection for the buyer and the lender in case of any damage to the property. The cost of the insurance policy will vary depending on the size and location of the property, as well as the coverage limits.
Real Estate Administrative Fee
Real estate administration fees are fees that cover the costs of processing the paperwork and administrative tasks associated with buying or selling a property. These fees are typically charged by the real estate brokerage and can vary in amount depending on the company and the location. However, it’s important to note that you should never pay more than $500 for a real estate administration fee. This is a standard amount that is considered reasonable and covers the necessary administrative tasks.
It’s also worth noting that the majority of your buyer agent’s commission will be paid by the seller of the property. This means that you, as the buyer, will typically not have to pay your agent directly for their services. Instead, the seller will pay a commission to both the buyer and seller agents, which is usually a percentage of the sale price of the property. This is why it’s important to work with a trusted real estate agent who can provide guidance and support throughout the home buying process.
When it comes to real estate administration fees, it’s important to understand what you’re paying for and to negotiate with the real estate brokerage if necessary. While it’s a necessary expense, you want to ensure that you’re not paying more than necessary. By working with a trusted agent and real estate brokerage, you can understand the costs associated with buying or selling a property and make informed decisions.
Home inspection fees are an important cost to consider when purchasing a home in Kalamazoo. These fees typically range from $350 to $500, depending on the size and condition of the property. Home inspection fees cover the cost of a professional inspection of the property, including the structural, mechanical, and electrical systems. This helps to identify any issues or potential problems with the property before closing, providing buyers with the information they need to make an informed decision.
It’s important to note that the home inspection fee is a fee that needs to be paid at the time of service, rather than at closing. This means that buyers will need to budget accordingly and ensure that they have the necessary funds to cover the inspection fee. It’s also important to work with a trusted and qualified home inspector who can provide a thorough and accurate assessment of the property.
Appraisal fees are another expense to consider when buying or refinancing a home. The appraisal fee is paid to a licensed appraiser who assesses the value of the property. The appraiser will look at the size, location, condition, and comparable sales in the area to determine the value of the property. The cost of the appraisal fee will depend on the location and size of the property.
Sometimes, appraisal fees will be due before the appraisal takes place. However, some lenders in Kalamazoo are able to pay the fee upfront and then have the borrower cover the cost at closing. This can help alleviate the financial burden for the buyer or borrower. It’s important to work with a trusted Kalamazoo lender and real estate agent who can provide guidance on the appraisal fee and other costs associated with the home buying or refinancing process.
The appraisal fee is a necessary expense to ensure that the property is valued accurately and that the lender has the information they need to determine the loan amount. By understanding the costs associated with the appraisal fee, buyers and borrowers can budget accordingly and ensure that they have the necessary funds to cover all the expenses associated with the home buying or refinancing process.
In addition to the standard closing costs and fees associated with purchasing a home near Kalamazoo, there may be additional miscellaneous expenses that buyers need to consider. These expenses can include survey fees, HOA dues, special assessments, and buy-in fees for certain neighborhoods.
Survey fees are paid to licensed surveyors who assess the property boundaries and identify any potential boundary disputes or encroachments. In Kalamazoo, survey fees typically range in cost depending on the size and complexity of the property. Buyers should budget accordingly for this expense.
HOA dues are fees paid to a homeowners association for the maintenance and upkeep of common areas and amenities. If the property is located in an HOA, buyers will need to budget for these ongoing expenses. HOA dues can vary in cost depending on the neighborhood and amenities provided.
Special assessments are one-time fees paid to an HOA or local government for unexpected expenses, such as road repairs or improvements to common areas. These assessments can be a surprise expense for buyers and should be considered when budgeting for the purchase.
Buy-in fees are fees paid to certain neighborhoods for membership or access to amenities, such as golf courses or private beaches. These fees can be significant and should be considered when evaluating the affordability of the property.