Anyone who has bought or sold property will know that the costs don’t end with the listed house price. Closing costs can be a huge expense when buying or selling a home and many people make the mistake of not factoring them into their overall budget. This means they can come as an unwelcome surprise when it comes to closing and might cause significant financial strain.
Not only can closing costs be expensive, but they can also be extremely confusing and many buyers and sellers aren’t entirely sure of who should pay for what or exactly what their closing costs cover. Being aware of the costs involved in buying or selling your home means you are able to budget effectively and ensure you’re choosing the lender with the best deal.
Here, we’ll take a look at what exactly closing costs include, who typically pays for what, and how you could significantly reduce your closing costs. We will get started with the basics:
What Are Closing Costs?
The term “closing costs” refers to any additional charges or fees outside of the listed property price. Exactly what these entail will vary depending on whether you are the buyer or the seller. They will also change based on your own specific buying or selling process.
Closing costs must be paid to finalize the purchase or sale and are generally paid at the time of contract exchange or completion. They cover things like:
- Appraisal fees
- Real estate agent commissions
- Escrow fees
Lenders offer different closing cost rates, with some offering to cover a portion of the costs themselves, and some charging lower closing costs than others. It’s important to consider your closing costs when comparing and choosing a lender rather than simply choosing the lender with the lowest current mortgage rates. The lender with the lowest interest rates might seem like the best option. If the closing costs are exponentially high, they might end up being a more expensive choice than the lender with slightly higher interest rates.
Buyer’s Closing Costs
Most of the closing costs are typically paid for by the buyer, although this isn’t always the case. Some of the fees listed below might be covered by the seller or the lender as an act of goodwill, but this will depend on the individual situation and the negotiation of the deal.
Related: First-Time Homebuyer’s Guide
Here are the most common closing costs charged to the buyer:
The origination fee covers the lender’s charges for processing your application and all of the administrative services involved in setting up the loan. These are typically 0.5% to 1% of the loan amount, so on a $200,000 mortgage, you could be looking at around $2000 on origination fees. The origination fee makes up a large proportion of your closing costs, but these might be negotiable. Depending on your lender, you might be able to reduce the origination fee by increasing your overall interest rate, which may or may not be worth it long-term.
The appraisal fee pays for your property to be valued by an appraiser. This is a mandatory part of buying a home with a mortgage and your lender will more than likely request that you use their chosen provider to carry out the appraisal.
These tend to average around $500 but could be more or less depending on the size of the property and your chosen lender.
Title Search and Insurance
The title search and title insurance are also important parts of closing contracts. A title search will ensure that no other party has rights to any part of the property and the insurance protects you and the lender against any undiscovered claims. The cost of a title search and title insurance varies from state to state but the search alone is likely to set you back anywhere from $75 to $200.
Many lenders ask that buyers have adequate private mortgage insurance (PMI) to protect the lender in the event of mortgage default. This is usually the case when the loan amount exceeds 80% of the appraised value of the home.
Some lenders will ask for one upfront fee which can be paid upon completion, others might require ongoing monthly payments (monthly payments are the most common). Typically, once your loan balance drops below 80% of the appraised value of the home, you can stop making PMI payments.
Some of your closing costs or your down payment might have to be paid upfront and in advance of contract completion. In this case, they will be placed in escrow. Escrow fees cover the costs of the escrow agent, administrative fees, and your chosen service.
Related: The True Costs of Owning a Home
Seller’s Closing Costs
Sellers also have costs that need to be paid in order to complete the transaction. Although there are fewer different fees for sellers, they can still add up to a substantial amount of money. These are the basic fees that most sellers will pay upon completion.
Real Estate Agent’s Commission
Typically, the seller will pay for the commission of their real estate agents and the buyer’s real-estate agent. This will generally be deducted from the overall sale price upon completion. Most realtors will charge around 6% commission, although some will charge slightly less or more than this. The commission is generally split between both realtors and is generally negotiable, to some extent.
The transfer tax is charged for the changing of property ownership from one owner to another. It’s essentially a transaction fee and is usually paid for by the seller. The charge will vary greatly depending on your location. In some cases, if the seller is unable to cover the transfer tax, this might be paid for by the buyer.
Sellers are also required to pay escrow fees, which are generally calculated based on the overall sale price, although some escrow providers will charge one pre-disclosed flat fee. The charge pays for the closing of the transaction and the holding of any funds prior to this.
How Can You Reduce Closing Costs?
Although some closing costs will be unavoidable, there are some ways of reducing them or avoiding them completely.
While the costs are unlikely to be waived entirely, often lenders or sellers will agree to cover a portion of the buyer’s costs to increase the chance of securing the sale.
Here are the most common methods buyers will use to waive some of their costs:
Negotiate with the Lender
In some cases, lenders are willing to waive some of the closing costs imposed on the buyer. However, it’s worth noting that more often than not this will come with an increase in overall interest rates. Be sure to take the time to assess which option will work out cheaper in the long run.
Lenders understand that often buyers simply don’t have the funds to pay all of these costs upfront, so it might be worth enquiring about this if you’d rather spread the costs. This is sometimes referred to as lender credit and will likely come with a number of specific terms and conditions, so of course, be sure to read these thoroughly and shop around before agreeing to anything.
Negotiate With Your Buyer or Seller
If you’re struggling to cover your part of the closing costs, it might be worth communicating this to your buyer or seller. Often, the other party will be willing to help you out with your end of the costs in order to ensure that the sale goes through successfully. This really depends on the market conditions and how motivated they are to complete the sale.
Typically, the buyer will cover most of the closing costs, however, it is not unusual for the seller to agree to pay all or part of the costs in order to reduce the burden on the buyer (referred to as “seller assist”) and increase the chance of a quick and straightforward sale. It is always worth negotiating on closing costs to ensure you’re getting the best deal possible.
Keep in mind the seller assist will often impact the price of the home. For example, the seller may be willing to cover $10,000 of closing costs if the buyer is willing to pay $10,000 more for the house. The details of seller assist are just another factor that will be considered during the negotiation process.
Sell Your Home Independently
Selling your home without the help of a realtor is a common way of saving on some closing costs. Real estate agent commission fees can be pretty expensive and if you have a good understanding of the property market and your home is likely to sell fairly easily, you might be able to bypass these costs entirely by advertising and selling your home privately.
However, it’s important to keep in mind that the buyer may have an agent that still needs to be paid and if you’re not willing to pay the buyer’s agent it may reduce the number of people who look at your house.
Use a Discounted Realtor
Instead of selling your home without a realtor, a better approach may be to use a realtor that offers a discounted rate. Although 6% is the standard rate, it’s not hard to find options that will cost you less money while still providing you with the valuable services of a professional.
Some realtors offer a lower percentage and others will work for a flat fee. Learn more about the options related to discount real estate brokers.
Closing costs shouldn’t put you off from buying or selling a home, but they should definitely be considered and factored into your overall expenses.
They are often highly negotiable and can be reduced significantly in most cases. Don’t be reluctant to negotiate and always try to get the best deal possible.
Closing costs can be a significant expense but they are a necessary part of buying or selling your home, as much as the down payment or your monthly installments, so make sure they are factored into your budget accordingly.