Are you considering buying a new home or refinancing your current mortgage in Metro Detroit or Michigan? If so, it’s essential to understand how much money is going to be needed to complete the transaction. Besides the down payment on purchase transactions, there will be mortgage closing costs and prepaid expenses. It may sound like there are a lot of costs and they’re expensive but don’t worry – they aren’t, and we’re here to break them down for you in simple terms, ensuring you have a clear understanding before diving into the mortgage process.

What Are Mortgage Closing Costs? Mortgage closing costs refer to the fees and expenses associated with finalizing a real estate transaction. These costs are typically paid at the closing table in the case of a purchase or are typically rolled into the new mortgage amount in the case of a refinance. Closing costs can vary depending on factors such as the loan amount, the type of mortgage, and the location of the property, believe it or not. It is important to note that not all of the closing costs associated are being paid to the lender originating the mortgage, the majority of them are third-party fees for things like title insurance, appraisal, and others. Since mortgage lenders are creditors and obtaining a mortgage is applying for credit, the lender is required to disclose to you as the entity offering the credit, all costs associated with obtaining the credit, even if the fees are paid to third-party service providers.

Common types of closing costs include:

1. Origination Fees: These are fees charged by the lender for processing and underwriting the mortgage loan.
2. Appraisal Fees: Lenders often require a professional appraisal of the property to determine its market value.
3. Title Insurance: Title insurance protects both the lender and the buyer against any legal issues or disputes related to the property’s title.
4. Attorney Fees: In some states, buyers may need to hire an attorney to handle the closing process.
5. Recording Fees: These fees cover the cost of recording the deed and mortgage documents with the appropriate government office.
6. Home Inspection Fees: Buyers may choose to have a home inspection to identify any potential issues with the property.
7. Credit Report: This is self-explanatory. It’s hard to obtain any type of credit without one.
8. HOA Documents/Questionnaire: If the home is a condominium, the lender will need some documentation regarding the HOA which will come from the property manager and unfortunately they do not provide them for free.
9. Mortgage Points: Buyers can choose to pay mortgage points to lower their interest rate, with each point equal to 1% of the loan amount.

What Are Prepaid Expenses? Prepaid expenses, also known as prepaid items or closing prepaids, are expenses that are paid in advance at the time of closing. These expenses are separate from closing costs but are often included in the total amount due at closing. Prepaid expenses typically cover ongoing costs associated with homeownership, such as property taxes and insurance premiums.

Common types of prepaid expenses include:

1. Property Taxes: Buyers may need to prepay a portion of the property taxes due for the year to establish an escrow/impound account.
2. Homeowners Insurance: Lenders require borrowers to have homeowners insurance to protect the property against damage or loss.
3. Mortgage Insurance: Buyers who make a down payment of less than 20% may need to pay for mortgage insurance to protect the lender against default.
4. Prepaid Interest: Buyers are required to pay interest on the mortgage loan from the closing date until the end of the month.

Understanding the difference between closing costs and prepaid expenses is crucial for budgeting and planning purposes when purchasing or refinancing a home. By familiarizing yourself with these concepts, you’ll be better prepared to navigate the mortgage process with confidence.

If you’re ready to take the next step toward homeownership or refinancing in Metro Detroit or Michigan, reach out to us today. Our team of mortgage experts is here to guide you through every step of the process and help you achieve your homeownership goals.