What Are Closing Costs?
Understanding Closing Costs
A range of professionals is typically involved when real estate is bought and sold. Closing costs are mostly associated with paying these professionals for their services rendered through the entire transaction. Still, the exact costs depend on the purchase terms.
Closing costs are exclusive of the purchase price of the property. However, typical closing costs total anywhere from 2% to 6% of this purchase price.
Both buyers and sellers pay closing fees. Buyers typically pay for a bulk of the closing costs, but sellers’ closing costs can also be substantial depending on the purchase contract and the requirements of the area.
Lenders give buyers an estimate of closing costs within three days of the filing of a home loan. The loan estimate details the property’s purchase price, mortgage amount, interest rate, and closing costs, including fees for appraisals and inspection, insurance, title-related expenses, and property taxes.
The closing costs may go up or down depending on the changes in circumstances. Three days before the closing date, the buyer gets a closing disclosure that confirms the actual costs of the mortgage and all the payments due at closing.
How to Estimate Closing Costs
Total closing costs vary based on several factors: the location of the home, the size and type of the property, the amount of the downpayment, and the type of home loan. Variables also include the requirements of the state or municipality where the property is located.
On average, buyers may pay closing costs that typically range between 2% to 6% of the property’s purchase price. For example, a home worth $200,000 may require closing fees anywhere between $4,000 to $12,000.
BY THE NUMBERS: The District of Columbia tops the list of states with the highest average closing costs, including taxes, amounting to $30,352.
What Closing Costs Should Buyers Expect to Pay?
Here are some of the most common closing costs that buyers have to pay in a real estate transaction:
- Loan origination fee. Lenders charge an origination fee to prepare and process the paperwork for the loan. Origination fees are usually a percentage of the loan amount.
- Application fee. Application fees are associated with loan processing. The fee covers the costs of checking credit and running a credit report. However, not all lenders charge an application fee.
- Underwriting fee. Underwriting covers the costs of assessing an applicant’s creditworthiness and evaluating a loan application.
- Loan discount points. Buyers may choose to pay discount points to the lender in exchange for a lower interest rate over the loan’s lifetime, allowing them to lower the monthly mortgage payment. 1 discount point is equivalent to 1% of the mortgage amount.
- Appraisal fee. Lenders require an appraisal to determine the property’s market value and ensure that the home is worth the sale price.
- Survey fee. A survey determines and validates the property’s boundaries and dimensions.
- Home inspection fee. A home evaluation assesses the physical condition of the property before a sale is finalized.
- Escrow deposits and fees. Lenders may ask buyers to pay a few months’ worth of property taxes and insurance into an escrow. The escrow company takes a portion of this money at closing.
- Attorney fees. Attorneys help handle the paperwork for government filing, escrow, notary, and other closing documents for the transfer of the deed.
- Title search fee. This process involves researching the title and checking the property’s background to find any claims against it.
- Mortgage insurance fee. A lender may require the buyer to pay for private mortgage insurance if the down payment is less than 20% of the purchase price (e.g., for FHA loans).
Note that many of the above-mentioned fees (for example, survey fees, appraisal fees, underwriting fees, and application fees) are required because of the real estate lender’s involvement in the transaction. As a lender, they need to verify the value and status of the subject property, which is their collateral on the loan.
If a buyer is purchasing a property for cash with no financing involved, many of these fees will be either discretionary or unnecessary altogether because there is no lender to require them. That said, some of these things are simply wise due diligence.
What Closing Costs Should Sellers Expect to Pay?
Here are some of the most common closing costs that sellers have to pay:
- Title insurance premiums. Sellers typically pay for title insurance issued to the buyer. The mortgage lender also requires a title insurance policy, but the buyer usually pays for this one.
- Recording fees and transfer taxes. Sellers pay for fees and taxes that the local government requires to transfer the title of the home.
- Attorney fees. This is paid to the attorney who represents the seller at closing.
- Real estate agents’ commissions. In general, sellers are responsible for paying all sales commissions of the real estate agents of both parties. Sales commissions can range from 4% to 6% of the property’s sale price.
Can Closing Costs Be Avoided?
Negotiating with the seller is one way for a buyer to reduce (even eliminate) closing costs. A seller may be motivated to close a deal on a property quickly and pay closing costs if there is an attractive offer or if costly repairs should be made on the property.
Buyers may also shop around and look for great deals on closing costs, like lower origination fees, loyalty rewards, and other deals related to the documents and processing. In addition, they may check different options from lenders and see if there are competitive rates.
First-time home buyers may also go for assistance programs, loans, and grants to help them with down payment and closing costs.
Also, as mentioned earlier, if a property is being purchased in a cash transaction with no financing involved, many of the buyer’s typical closing fees will not necessarily be required.
- In real estate, closing costs are the expenses, fees, and charges that must be settled at the end of the home buying process to complete a purchase.
- Closing costs are in excess of the purchase price and typically range from 2% to 6% of the property’s purchase price.
- Both buyers and sellers pay closing fees, and the amounts are based on the terms of the home purchase agreement.
- Total closing costs vary based on several factors: the location of the home, the size and type of the property, the amount of the downpayment, and the type of home loan.
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