When you’re buying or selling a home, the term “closing costs” often comes up. These costs are a crucial part of the real estate transaction, but they can sometimes catch buyers and sellers off guard if they’re not prepared. Understanding closing costs will help you budget more effectively and avoid any surprises at the closing table.
Here’s a breakdown of what closing costs are, what they typically include, and who is responsible for paying them.
What Are Closing Costs?
Closing costs are the fees associated with finalizing a real estate transaction. These costs are paid at the “closing,” when the title of the property is transferred from the seller to the buyer. They can include a variety of services, ranging from loan origination fees to title insurance and beyond.
On average, closing costs range from 2% to 5% of the home’s purchase price. However, they can vary based on the location of the property, the type of loan, and the terms negotiated between buyer and seller.
Common Types of Closing Costs
There are several common fees that both buyers and sellers should be aware of when planning for closing costs:
- Loan Origination Fee
- This is a fee charged by the lender for processing the loan. It typically ranges from 0.5% to 1% of the loan amount. - Appraisal Fee
- The lender will require an appraisal of the property to determine its market value, ensuring that the loan amount does not exceed the property’s worth. Appraisal fees generally range from $450 to $600. - Title Search and Title Insurance
- A title search ensures that there are no outstanding claims or liens against the property. Title insurance protects the buyer and lender against any future disputes over property ownership. Costs for this can vary but typically fall between $1,000 and $2,000, depending on the home's value and the state. - Inspection Fees
- A home inspection, while not always required by the lender, is highly recommended for buyers. This typically costs between $350 - $700 depending on the size of the home. Additional inspections, such as termite/pest, sewer lateral, fireplace, septic and well inspections, may also be a good idea to do. Each one will have a different cost. Your Realtor will fill you in on these costs when you work with them so you are prepared. - Prepaid Expenses (Taxes and Insurance)
- At closing, buyers will often need to prepay some costs like property taxes, homeowner’s insurance, and possibly mortgage insurance, if applicable. These costs can vary greatly depending on the location and terms of the loan. - Escrow Fees
- In some cases, buyers and sellers use an escrow service to manage funds during the transaction. Escrow fees are typically split between the buyer and seller, but this can vary based on local customs. - Recording Fees
- Local government entities charge a fee to record the deed and mortgage documents. These fees can vary by location but are generally between $50 and $200. - Real Estate Agent Commission
- While not technically a “closing cost,” the seller is typically responsible for paying the real estate agent commission to their listing agent and may offer a compensation to a buyer’s agent to get them to bring qualified buyers to sell their home. Commissions can be paid by seller, by buyer or both and are negotiable somewhat and should be discussed with your Realtor as to what the cost is and what you get for that cost. - Seller Concessions
- In some cases, sellers may agree to pay part or all of the buyer’s closing costs as a negotiation tool, especially in a buyer’s market. This can help ease the financial burden on the buyer.
Who Pays Closing Costs?
Buyers and sellers are both responsible for different portions of the closing costs, though some fees are negotiable and can be shared depending on the terms of the sale.
- Buyer’s Closing Costs: Buyers typically cover costs such as the loan origination fee, appraisal fee, inspection fees, title insurance for the lender, and any prepaid expenses like property taxes or homeowner’s insurance.
- Seller’s Closing Costs: Sellers usually cover the real estate commission, any outstanding property taxes, and in some cases, transfer taxes. Sellers might also cover the buyer's title insurance in certain states or negotiate other closing fees as part of the sale.
How to Reduce Closing Costs
Closing costs can add up quickly, but there are ways to reduce them:
- Negotiate with the Seller: In some cases, buyers can negotiate for the seller to cover a portion of their closing costs, especially if the market favors buyers.
- Shop Around for Lenders: Lenders’ fees vary, and you may find that some lenders offer lower closing costs or better terms than others.
- Ask for a No-Closing-Cost Loan: Some lenders offer loans with no closing costs in exchange for a higher interest rate. While this might seem like a good deal upfront, be sure to consider the long-term implications of paying a higher interest rate over time.
- Check for First-Time Homebuyer Assistance: Many states and local governments offer assistance programs for first-time homebuyers, which can help cover closing costs.
Understanding closing costs is essential whether you're buying or selling a home. By familiarizing yourself with the types of fees involved and knowing who is responsible for paying what, you can better plan for the final stages of your transaction. As your Realtor we would go over what costs you can expect when you buy and if you are selling we break down all your costs for that and show you what your equity net would be when selling. Knowing up front what your costs will be, helps to alleviate surprises and helps you better know what to plan for during buying or selling a home. Reach out if you want to discuss further what an estimate would be for you.
