If you’re a first-time homebuyer, it’s likely you have an idea about how much you can afford to spend on a home and that it’s in your best interests to pay a down payment. Yet, many first-time homebuyers forget that there are also mortgage closing costs involved when buying a home.
In our article, we’re going to have a look at everything you need to know about mortgage closing costs. By knowing everything you can, you’re not left in the lurch when it’s time to make your home purchasing decision.
What Exactly Are Mortgage Closing Costs?
So what exactly are mortgage closing costs? Well, simply put, mortgage closing costs are the fees that need to be paid to cover the property. These fees often include mortgage and insurance costs incurred by your lender when processing your loan.
According to Michigan law, your lender is required to provide you with your loan estimate within three business days once they have received your application. Your estimate will provide you with a detailed list of what you can expect your closing costs to be. You should note that this document is a TILA-required lender disclosure. That means it is a good faith estimate of the cost of the loan you have undertaken.
Additionally, within three business days, you will receive a closing disclosure before you close on your home. This disclosure will provide you with the actual mortgage closing costs. Since this will be given to you within three business days, you will have time to check through the documentation and question any discrepancies you find before you finalize closing on your new home.
What Do Mortgage Closing Costs Typically Pay For?
Now that you know what mortgage closing costs are, you’re likely wondering what mortgage closing costs typically pay for. Have a look below to learn what you can expect to be covered by your closing costs. Yet, it’s important to remember that local insurance fees, interest rates, and tax rates can impact your closing costs.
Government taxes: Often, government taxes could include local government fees like the fee that will need to be paid to record the sale of your home and property taxes. Usually, these government taxes will also include the tax charge for transferring the title from the seller to your name.
- Title insurance: Your title insurance is going to protect your lender from financial losses that could arise because of issues related to ownership conflicts or problems with a property title.
- Tax service provider fees: These fees are included in your mortgage closing costs because they help pay for third parties to undertake tax monitoring duties such as keeping track of property tax payments.
- Appraisal fees: An appraisal fee is charged by the appraiser who visited the home you intend to purchase. They charge a few for the services they rendered that involved assessing the home’s value and determining the appropriate loan amount you needed.
- Prepaid expenses: You need to pay prepaid expenses so that the costs of your homeowner’s insurance, interest, and property taxes are paid until the first payment on your home is due.
How Much Are Mortgage Closing Costs?
Many first-time homeowners are curious about how much they should expect to pay for mortgage closing costs. You will likely be pleased to learn it’s not as much as you might have previously thought.
On average, closing costs for a buyer range between 2% and 5% of their loan amount. Essentially, this means that if you purchase a home that costs $300,000, you will be required to pay between $6,000 and $15,000 in closing costs.
Usually, the most cost-effective way to cover the closing costs of your home is out of pocket. This is because it will be a one-time expense that you won’t need to pay interest upon if you took out a loan to pay it. Essentially, if you were to add your closing costs to your loan, you would have to pay interest on those costs throughout the entire life of your mortgage.
Interestingly, when you’re buying a home, you can negotiate some of the fees so that your closing costs are lowered. Additionally, in Michigan, a few low-interest loan programs and grants are available to first-time homebuyers that help with mortgage closing costs.
Are Mortgage Closing Costs Tax Deductible?
Another commonly asked question associated with mortgage closing costs is if they are tax-deductible. Well, according to the IRS, the only closing costs you are allowed to deduct are the real estate taxes that you were required to pay upfront and the points you used to lower your home’s mortgage interest rate.
Additionally, if you itemize, you could be able to deduct these costs in the same year you purchased your home. Moreover, since tax rules are continuously changing, it would be best to consider consulting a tax professional who can help you evaluate and determine what you’re permitted to deduct from your mortgage closing costs.
Now you hopefully know more about mortgage closing costs than you did before. However, we realize understanding mortgage closing costs can be difficult, which is why it’s often best to speak with a mortgage lender. At Loan X Mortgage, we know everything there is to know about mortgage closing costs in Michigan.
We can help you determine what closing costs you will likely be required to pay with a good faith estimate, and we can establish if you could add your closing costs to your loan. To speak with one of our committed and knowledgeable lenders, you can contact us today.