Understanding Closing Costs – A Definitive Guide

When buying their first house, everyone tends to focus on saving up money for the down payment. After all, it is a huge amount of money to save up for, can take a long time, and can seem like the main goal towards new homeownership. However, when becoming a homeowner, you must also consider closing costs.

What are closing costs? They are the expenses, besides the principal cost of the house, that buyers and sellers incur to complete a real estate transaction. They come up when the title of the property is transferred from the seller to the buyer. The exact dollar amount depends on where the property is being sold and the value of the property being sold. The average amount of closing costs that homebuyers pay is around $4,800.

How expensive are they? Well, closing costs typically amount to between 3% and 6% of the total purchase price of the home. On a $100,000 house, that’s around $5,000 in closing costs. On a $600,000 house, that’s around $25,000. It can add up! If you want a more concrete estimate of what your exact closing costs will amount to, there are many closing costs calculators online that will help you, although they do require a little more information than just the purchase price of your new home. There is no way to know an exact number without talking to your mortgage lender or your real estate agent.

When are closing costs due? Typically, they are due at the end of escrow when your loan closes. Which closing cost is paid by what party (buyer or seller) is negotiable to some extent and can vary between specific situations. For example, if the market is swayed towards the buyer, you can often get a seller to pay for more than their usual share of closing costs. You can talk to your real estate agent to learn more about negotiating closing costs.

What is included in closing costs? These things typically vary from house to house, and they also very from region-to-region. The full list of closing costs you’ll be expected to pay will be delivered to you in the loan estimate provided by your lending agents. It is law that you must receive this information from your lending agent within three days from the time you submit your loan application.

Potential Closing Costs:

  • Real Estate Commission: The commissions for both buyer and seller’s real estate agents are typically paid for by bother the buyer and the seller, each paying half. The total amount for both commissions combined is around 5% of the total deal, but this number is not concrete. You can discuss this number with your real estate agent before you even agree to work with them, so make sure you do so!
  • Pro-Rated Property Taxes: This cost will likely be pro-rated unless you move into your home on the first of the month, but either way, it is standard for buyers to pay two month’s worth of county and city property taxes at the time escrow closes.
  • Pro-Rated Homeowner’s Association Fees: Like the property taxes, this fee will likely be pro-rated unless you move in on the first of the month. If your new house is in a neighborhood with a Homeowner’s Association, you’ll likely have to pay HOA fees at closing time.
  • Any Recording Fees to Satisfy the Deed of Trust: When a new deed is written, it must be recorded. The fee for this could be between $12 and $15. Some agencies charge differently than others (per document vs per page), so be sure you ask for more details so you know what you should expect.
  • Attorney Fees (Including Faxes, Copies, and Courier): There is always an attorney involved with getting a new house. This fee is typically covered by the seller and can amount to a total of 6% to 10% of the selling cost of the house – but it won’t come out of the seller’s pocket, it will be deducted from their profit on the home.
  • Assumption Fee: If you “assume” someone else’s existing mortgage, there could be a small fee (based on the balance remaining on their principal). This fee will be due at closing time.
  • Lender Fees: These fees can widely vary. You can ask potential lending agents about their lender fees before even agreeing to work with them, so you should have some idea of what to expect.
  • Home Warranty (Negotiable): A home warranty covers the cost to repair your major appliances and important home components from normal wear and tear. It provides protection against appliance failure. Contracts are normally good for one year. The cost is usually between $300 and $600 per year. Sometimes these costs are paid during closing time.
  • Appraisal Fees: Typically, this fee is usually between $300 and $500. It is a  mandatory part of the escrow process required by your lending agent. An appraisal is meant to ensure that your home is actually worth the sales price you are paying for it, so it’s in your best interest.
  • Attorney’s Fee for Closing: Attorney’s fees typically include things like paying notaries, government filing fees, escrow fees, and other legal expenses. To find out more details about your attorney’s fees, ask your lending agent.
  • Title Insurance: Title insurance covers either a homeowner or the lender that financed the mortgage for the property. Lenders require buyers to pay for title insurance as a part of your closing costs. The cost for title insurance varies.
  • Title Fees: These are the costs accrued in transferring the house’s title from the seller’s name to your name. This should be a small cost.
  • Survey (Optional): You can elect to have a property surveyed at any time, but you’ll want it done before you buy a home. Most mortgage companies do require a property survey.
  • Home Inspection Costs: The home inspection is different than the home appraisal. This cost will usually total between $300 and $500. While technically not due at closing time (this fee is paid in person to the home inspector themselves), it must be considered while saving for closing costs.
  • Earnest Money: This is a small amount of money (usually between 1% and 3% of the purchase price of your home) that ensures your escrow account as soon as your deal is accepted by the seller. This amount is eventually subtracted from your closing costs, so you’ll owe less at the end of escrow.
  • Escrow Fees: Escrow fees can include a number of factors. For example, you may be asked to pay your insurance up front, or contribute portions of your yearly property taxes ahead of time. This money goes into your escrow account and counts as a closing cost.
  • Private Mortgage Insurance (PMI): Private mortgage insurance is required when you do not put at least 20% down on your new home. This is not required by law in any other circumstance. Instead of paying this fee monthly, you can opt to pay it in full with your other closing costs.
  • Loan Interest: Sometimes there is a small space of time between the closing date and the first day of the next month. If this is the case with your home purchase, you will need to make a small payment of pro-rated loan interest to cover this time.
  • Loan Discount Points: Purchasing a loan discount point is entirely elective. Loan discount points are the best way to decrease your overall interest amount for your loan, and by paying this fee at closing time, you lock in this lower interest rate. Talk to your lender for more information.
  • Flood Certification: If your new home is listed as “near a floodplain”, you must get a certification from FEMA (The Federal Emergency Management Agency) to confirm it’s status. It should only cost between $15 and $20, but it is an important step if your home is at a flood risk.

Kindly note that not all of these costs and fees will be required with ever home purchase. As mentioned previously, closing costs differ house-by-house and region-by-region.

Typically, a  buyer (that’s you!) will usually pay form all fees that are directly related to getting your home loan, appraising and inspecting your new house, the title, the underwriter, the survey fees, and the commission for your real estate agent, at minimum. A seller will typically pay for the attorneys, if they used one, taxes on the sale of the home, title transfer fees, and their real estate agent’s commission fees.

No matter what, you will end up paying closing costs, but there are ways to lower them. To know what you’re responsible for, talk to your real estate agent or your mortgage lender. They will be able to guide you to your next steps so that you can be properly prepared to take on closing costs and everything that they entail.