Closing costs are one of those often overlooked items in a real estate transaction.
To avoid an unpleasant surprise on closing day, it’s essential to know what happens at a house closing and the ins and outs of closing costs. Once you understand what you’re paying for, you’ll be in a much better position to negotiate the fees involved with a closing, before you sign the papers on closing day.
In this article, we’ll take a look at what closing costs actually include, how much closing costs are, who pays closing costs when selling a house, and how to save on closing costs.
Let’s begin by addressing what closing costs are actually for…
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What are closing costs?
Closing costs, also sometimes referred to as “settlement fees,” are defined by Zillow as the “fees associated with your home purchase that are paid at the closing of a real estate transaction.”
Essentially, it’s a collection of individual fees for items related to the “closing” of a property. And, if you’re not sure what “closing on a house” means, it simply refers to the date that the ownership of the property is transferred from the current owner (the seller) to the new owner (the buyer).
So, what closing costs are for are to cover a lengthy list of services involved in the sale of a home, each of which incurs its own fees.
Let’s explore closing cost fees in more detail…
Closing cost fees explained
If you’re wondering exactly what closing costs are for, they cover a laundry list of items involved in the application of the loan, inspection of the home, and transference of the deed from the seller’s name into the buyer’s name.
The Mortgage Reports company explains that these fees can be grouped into three categories: “lender charges, third-party charges, and prepaid items.”
When you look carefully within each of these categories, you’ll find that these fees generally account for the following 14 components of a real estate transaction:
1. Appraisal fee
In order to verify that the value of the house you wish to take out a loan on has a higher value than the loan amount, lenders require an appraisal. This process usually costs a few hundred dollars and involves an appraiser coming to the house and inspecting it to verify the property value.
2. Credit report fee
To ensure that you qualify for a loan, your lender would run a credit check. This gives the “all clear” to the lender to move forward with issuing you a loan, and it determines the interest rate at which the loan will be offered to you. This fee is one of the lowest on this list, usually running at a flat $14.50.
3. Origination fee
“Also known as an underwriting fee, administrative fee or processing fee,” the origination fee is what the lender charges to evaluate and prepare your loan and is typically 0.5-1% of the loan amount.
4. Loan discount points fee
Lenders typically give you the option to “buy down” your interest rate. This means paying a bit more upfront, but the lower interest rate could save you money in the long run. It’s usually only something to consider if you plan to pay off the loan slowly. If you decide to do “buy down” points, it means more money up front at the closing.
5. Home inspection fee
A home inspection is not always required, but it is usually performed to verify the condition of the property. This can cost several hundred dollars, but it’s one of those fees that can be well worth it as, if something is very wrong with the property, you may want to walk away from the purchase and avoid much larger future payments for repairs.
6. Application fee
Some lenders charge an application fee. When they do, it should cover a few other service fees on this list, such as the credit check fee, so always check with your lender about this fee upfront.
7. Title search
To perform a title search on the property and ensure that nobody else has rights to the deed, the title company will also require a fee. This fee is usually $75-$200, but still adds to the overall closing costs.
8. Title insurance
Most lenders require the purchase of title insurance, which protects them from issues with ownership after the closing date. This fee can be as much as 0.5-1% of the loan amount.
9. Underwriting fee
Loans require pages and pages of paperwork, and this underwriting process requires hours of administrative work. As such, you can expect to pay a fee of about 0.5% of your loan amount.
10. Escrow fee
On the date of your closing you may also be required to pay up to two months of property taxes upfront, which will be placed in your escrow account.
11. Property taxes
In addition to the upfront escrow fee, most lenders will also ask you to pay in advance for any anticipated taxes due in the next two months.
12. Attorney fee
In some states the law requires that an attorney is present at the closing. Of course when it comes to hiring an attorney, hourly fees can add up fast, so ask your lender if this is a requirement and, if it is, be prepared to cover the attorney’s cost.
13. Transfer taxes
Once the sale is official and the title is transferred from the previous owner (the seller) to the new owner (the buyer), taxes on the transaction are required to be paid as well.
14. Courier fees
Lastly, if any loan documents need to be couriered safely for processing, you may also be billed for courier fees.
Because there are so many fees included in closing costs, they can be quick to add up and it’s important to review them thoroughly and understand exactly what you are paying for.
Who pays closing costs on a house?
Curious who pays closing costs on a house? Let’s review that commonly asked question in more detail.
If you are the buyer, you are probably hoping it’s the seller who pays the closing costs and, if you’re the seller, well, it’s safe to assume that you’re hoping closing costs fall to the buyer. In reality, both the buyer and the seller pay closing costs.
So, the answer to the question “who pays closing costs when selling a house” is the buyer and the seller, but the amount you’ll pay differs…
How much are closing costs?
Closing costs for the buyer are typically between 2% and 7% of the total loan amount taken out to purchase the home. The percentage range accounts for the price of the house, the location of the house, and the current state of the real estate market in the area the house resides.
So, if you’re purchasing a home for $250,000 and applying a 10% down payment towards the purchase, then you can expect to pay between $4,500 and $11,250 in closing costs.
As you can see from that example, closing costs are usually several thousand dollars, which is why it’s necessary to be informed about closing costs, prepare accordingly, and avoid surprises, before your closing date.
And, just when you thought what the buyer pays was a lot, Zillow estimates that sellers will pay about double what the buyer will pay in closing costs—seller closing costs can reach up to 10% of the sale price.
How can you avoid some of the closing costs?
Many closing costs are inevitable and unfortunately cannot be avoided, while other closing cost items are billed by some companies and not others. So, while you won’t be able to get away without paying closing costs at all, there are ways to avoid some of the closing costs, or reduce the amount you’ll have to pay.
An Investopia article explores ways to reduce your closing cost expenses and cites 5 specific ways to do so:
1. Shopping around and comparing your options.
It’s a free market and rates are not consistent from lender to lender, or from service to service. Do your research before you decide on your lender and, even after you pick your lender, keep in mind that you don’t always have to use the service providers they recommend for things like your appraisal and the title company. Those service providers all have varying fees as well, so it can save you a lot on closing day to shop around upfront and carefully select the companies you choose to work with.
2. Scheduling your closing towards the end of the month.
One of the little-known facts that can save you some money is that by scheduling your closing date near to or right at the end of the month can reduce daily interest rate charges. While this isn’t a huge amount, it all adds up, so it’s worth checking with your lender to see how changing your closing date could help you save on closing costs.
3. Asking the seller for assistance.
When a seller is motivated to sell, you might be able to solicit their assistance in paying all, or a portion of, the closing costs. This can be done by lowering the overall price you pay for the home, or simply by covering a portion of the closing costs. It never hurts to ask as the worst that can happen is the seller says “no.”
4. Carefully comparing loan and disclosure documents.
The “devil is in the details” or so the saying goes, and loan and disclosure documents are no exception. Be very thorough in reviewing loan and disclosure documents to make sure you are only being charged for what you should be charged for. Ask questions if you see anything that doesn’t seem right, or that you don’t understand, and inquire as to whether there will be a change in fees between pre-approval and closing.
5. Negotiating loan-based fees.
To further complicate the situation, not all lenders charge for the same loan-based fees. By looking closely at the fees lenders charge, you might notice that one lender bills for application and underwriting fees, for instance, while another lender does not. The same applies to items like loan processing fees, rate lock fees, and broker rebates, so read the fine print closely and negotiate a lower fee wherever you can.
Lastly, you could also find out if you can defer your closing cost payments by rolling the closing costs into your mortgage. This won’t avoid or reduce costs, but it will mean you can pay them off over time, instead of in one big lump sum on closing day. The disclaimer here is that mortgage interest rates tend to be high, so you will likely end up paying way more for your closing costs than you would if you settled them at your closing.
In summary, closing costs are inevitable in a real estate sale.
While you can’t avoid closing costs on all accounts, it is beneficial to understand what happens at a house closing, what closing cost fees entail, and how you can avoid or negotiate closing costs. Every little fee adds up, so even if you can bring down the cost on only a few items, you could save yourself paying thousands of dollars in closing costs on your closing day.