Closing costs are expenses in addition to the price of the property in a real estate transaction to transfer the title from the seller to the buyer. While the total closing cost depends on the property’s value and location, buyers typically pay between 2% to 5% of the purchase price.
Federal laws through the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA) require lenders to provide a Loan Estimate that reveals the closing costs on the property within three days of receipt of a loan application. At least three days prior to the closing, the lender should provide a Closing Disclosure statement outlining all closing fees.
Types of Closing Costs
1. Loan Origination Fees
Origination fees are fees charged by the bank for the creation of a loan. Loan origination fees are typically typically 1% of the mortgage.
2. Discount Points
The buyer can purchase discount points up front to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are negotiable and can be covered by the bank.
3. Appraisal Fees
Lenders often require an appraisal, which is about $300 to $500 in most areas.
4. Title Insurance
Title insurance covers events relating to the title that have already happened. For example, there may be tax liens not paid by someone who owned the house a decade ago. Title insurance would protect the buyer from paying the tax lien. However, it doesn’t cover anything that happens to the title after the date of issuance. Therefore, it wouldn’t help you for liens filed against the property for taxes you didn’t pay.
Title insurance is usually paid for both lender and owner. The lender’s title insurance protects the lender from claims against the house. The owner’s title insurance protects the homeowner’s investment for as long as they, or their heirs, own the property.
5. Prepaid Costs
Prepaid costs are expenses associated with your home that need to be paid in advance when getting a loan. These include property taxes and homeowners’ insurance. They may also include mortgage interest that will accrue between the closing date and month-end. The lender states these costs in a Good Faith Estimate within three days of a home loan application.
6. Private Mortgage Insurance (PMI)
Private mortgage insurance is a closing cost that is applied to any home purchase with a down payment less than 20%. Private mortgage insurance protects the lender from losing money if the borrower ends up in foreclosure. PMI fees vary around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the downpayment and the borrower’s credit score.
7. Recording Fees and Taxes
Local governments charge recording fees and taxes to record the sale of property. These transfer taxes (another term for recording fees and taxes) vary from state to state. For example, in California, the tax is assessed on any transfer that has a value of more than $100, and the rate is $.55 for each $500 of value. In New York, the rate is $2.00 for each $500 on all transfers. New York has a separate mortgage recording tax, with a rate of $.50 per $100 of value.
8. Other Miscellaneous Costs
These are not the only closing costs. Depending on where the property is located and other factors you may also have to pay the following:
- Title searches
- Credit report charges
How Much Are Closing Costs and How Are They Calculated?
Homebuyers typically pay between 2 to 5 percent of the purchase price of their home in closing costs. That estimate can vary quote a bit depending on the amount of the loan, the mortgage type, or even the area of the country in which you are buying or refinancing. For example, if your home costs $120,000, you might pay between $2,400 and $6,000 in closing costs. The bulk of that, or the most expensive closing cost, are the fees that a lender charges to make a loan. But on average, buyers pay roughly $3,700 in closing costs, according to a recent survey.
Who Pays for Closing Costs? The Buyer or the Seller?
While buyers pay most closing costs, there are some costs that sellers offer to pay to sweeten the deal. Closing costs for sellers vary according to where you live, when you factor in commissions paid to Realtors, sellers typically pay anywhere from 6 percent to 10 percent of the home’s sales price at settlement.
The reason that commission costs are so high for sellers is that they essentially pay both the buyer’s agent, and the Seller’s agent. That commission is split between the listing agent and the buyer’s agent. In some cases, the buyer will change the sales contract to stipulate that the seller will pay the buyer’s closing costs up to a certain percentage or set dollar amount.
Most if not all closing costs are negotiable. Both buyers and sellers may negotiate on who pays which fees. The buyer usually pays more line-item expenses, and the seller usually pays the commission. Again, the seller may offer to pay a portion of or all of the closing fees for the buyer.
Are Realtor Fees Included in Closing Costs?
Yes. Most agents will factor Realtor fees into the closing costs paid by sellers. Realtor fees are typically 6% of the sale price of a home.
Example: How Much Are Closing Costs on a $300,000 House?
The total closing costs to purchase a $300,000 house could cost a homebuyer anywhere from approximately $6,000 to $15,000. Much of the variance depends on the points and origination fees a lender charges to make the loan, which is disclosed in the loan estimate.
How Can I Reduce My Closing Costs?
You can reduce your closing costs with a bit of planning and negotiation. While closing costs vary, in some cases they are negotiable. Here are some tips to reduce your closing costs:
- Ask the seller to sweeten the deal by paying some of the closing costs.
- Compare costs with different lenders.
- Evaluate the Loan Estimate.
- Negotiate fees with the lender.
- Save on points when interest rates are low.
The Bottom Line
Closing costs are expenses on top of the purchase price of a property in a real estate transaction. Closing costs are not set in stone, so try to negotiate to reduce your closing costs as much as possible.