If you’ve already bought or sold a home, closing costs have been part of the equation. But if you’re buying your first home, or it’s been a while, here are some basics to reference.
Closing costs are an essential part of any real estate transaction, yet they’re often misunderstood. For both buyers and sellers, understanding closing costs can help prevent last-minute surprises and make the process smoother. Let’s break down what these costs are, who typically pays what, and what you can expect as a buyer or seller.
What Are Closing Costs?
Closing costs are fees and expenses you pay to finalize a real estate transaction. They cover a variety of services and administrative expenses involved in transferring property ownership. While the total amount varies based on location and transaction specifics, closing costs typically range from 2% to 5% of the home’s purchase price.
What Buyers Need to Know About Closing Costs
For buyers, closing costs can feel like an unexpected expense, but knowing what’s included can help you plan better. Here are a few examples:
- Lender Fees: If you’re taking out a mortgage, lender fees will make up a large portion of your closing costs. These may include loan origination fees, underwriting fees, and appraisal costs to ensure the property’s value aligns with the loan.
- Title and Escrow Fees: Title insurance protects you (and the lender) from potential claims affecting the clear transfer of title on the property. Escrow fees cover the costs of an escrow service to hold funds and documents until the transaction is complete.
- Property-Related Fees: This includes an appraisal fee, home inspection fee, and sometimes survey costs, which confirm the property’s boundary lines.
- Prepaid Expenses: Certain upfront costs, like property taxes, homeowners’ insurance, and mortgage insurance premiums, are often required at closing. These go into an escrow account to cover upcoming payments.
- Agent Compensation: Negotiated compensation for a buyer’s agent to negotiate the purchase agreement, guide you through the various processes involved in a real estate transaction, including due diligence and various inspections, negotiating repairs, appraisal, as well as many other ways to support you in successfully getting to closing on time.
Buyers should review the Loan Estimate provided by their lender early in the process. This document outlines expected closing costs, so there’s time to plan and budget.
What Sellers Need to Know About Closing Costs
Sellers also incur some closing costs, though they’re generally lower than buyers’.
- Agent Commissions: Negotiated compensation to a seller’s agent to guide you in preparing your home for sale, listing on MLS service, marketing and showing your property, holding open houses if elected, negotiating on your behalf related to buyer repair requests, and many other functions to support you in successfully closing on the sale of your home.
- Title Fees: Some areas require the seller to cover the buyer’s title insurance. In other cases, it’s negotiated in the contract.
- Outstanding Property Taxes and HOA Fees: Sellers are responsible for any outstanding property taxes and homeowner association fees up to the closing date.
- Repairs or Credits: If the buyer requests repairs or credits for issues found during inspection, those may be added to the seller’s closing costs.
Closing Cost Negotiations
In many cases, buyers and sellers can negotiate closing costs. For instance, a seller might agree to cover some of the buyer’s closing costs to help close the deal. This is known as a seller concession and can be especially helpful in making a property more affordable for buyers.
Final Thoughts
While closing costs might seem overwhelming at first, knowing what’s included and who pays for what can make the process easier. Both buyers and sellers should go into the transaction prepared and ask their real estate agent any questions along the way. Understanding closing costs helps ensure a smoother, stress-free path to that exciting moment when the deal is officially closed!
