What are Closing Costs?

Understanding Closing Costs: What Buyers and Sellers Need to Know

When buying or selling a home, it’s easy to focus on the price of the property itself. However,
one of the most important financial considerations in any real estate transaction is the closing
costs. These are the fees and expenses paid at the closing of a real estate deal and are a
crucial part of the home buying or selling process.

Understanding closing costs and how they work can help you better prepare for the financial
side of your real estate transaction. In this guide, we’ll break down what closing costs are, who
pays them, and how to estimate them.

1. What Are Closing Costs?
Closing costs are the various fees and charges that both buyers and sellers must pay to finalize
the purchase or sale of a home. These costs typically include services related to the processing
of the home loan, title transfer, and property taxes. They are separate from the down payment
and can vary depending on the property location, the lender, and the specifics of the
transaction.
For Buyers:
As a buyer, closing costs typically range from 2% to 5% of the home’s purchase price. These
costs can add up quickly, so it’s essential to budget for them in addition to your down payment.
 For Sellers:
Sellers are also responsible for certain closing costs, which usually include agent commissions,
title fees, and any outstanding property taxes. In some cases, sellers may agree to cover a
portion of the buyer’s closing costs as part of the negotiation process.

2. Common Closing Costs for Buyers
Buyers typically have more closing costs to cover than sellers. Below are some of the most
common fees and expenses buyers should expect when purchasing a home:
a. Loan Origination Fee
This fee is charged by the lender for processing the loan. It usually ranges from 0.5% to 1% of
the loan amount and covers the lender’s administrative costs.
 b. Appraisal Fee
The appraisal fee covers the cost of having the property professionally appraised to determine
its value. This ensures that the lender isn’t lending more than the home is worth. Appraisal fees
typically range from $300 to $500.
 c. Home Inspection Fee
A home inspection is conducted to assess the condition of the property and identify any
potential issues. While it’s not always mandatory, it’s highly recommended, especially for older
homes. The fee for a home inspection generally ranges from $300 to $500.
 d. Title Insurance
Title insurance protects the buyer (and the lender) in case there are any disputes or issues with
the property’s title after the sale. The cost varies depending on the home’s purchase price and
location but can range from $500 to $1,500.
e. Attorney Fees
In some states, an attorney is required to oversee the closing process. Attorney fees vary
widely, but you can expect to pay anywhere from $500 to $1,500 for legal services.
 f. Prepaid Property Taxes and Homeowners Insurance
At closing, buyers typically need to prepay property taxes and homeowners insurance for the
first year. The amount varies depending on the property’s location and value.
     g. Recording Fees
These fees are paid to the local government to record the new deed and mortgage. Recording
fees are usually between $50 and $250, depending on the municipality.
h. Private Mortgage Insurance (PMI)
If your down payment is less than 20%, your lender may require private mortgage insurance
(PMI). PMI protects the lender if you default on the loan, and the cost is typically included in
your monthly mortgage payment. However, you may need to pay the first month’s PMI upfront at
closing.

3. Common Closing Costs for Sellers
While buyers cover many of the closing costs, sellers also have fees to pay. Here are some of
the most common costs sellers should expect:
a. Real Estate Agent Commission
This is typically the largest closing cost for sellers. Real estate agent commissions are anywhere from
0% to 6% of the home’s sale price and can be split between the buyer’s agent and the seller’s
agent. Sellers are responsible for paying the entire commission they agree to in their agency contract, which is deducted from the sale proceeds at closing. Buyers might be responsible for their agents commission if the seller is not willing to pay during negotiations or it is not offered in listing and it has been agreed to in their buyer agency agreement.
b. Title Transfer Fees
Sellers are responsible for transferring the property title to the buyer. This includes title search
and title insurance costs, which vary depending on the location of the property but usually range
from $500 to $1,500.
c. Property Taxes
Sellers are responsible for paying any outstanding property taxes up to the closing date. If
you’ve already paid property taxes for the year, the buyer will reimburse you for the portion of
the taxes that apply after the closing date.
d. Home Warranty (Optional)
Some sellers offer to provide a home warranty as an incentive to buyers. A home warranty
covers the repair or replacement of major systems and appliances in the home for a year after
the sale. The cost of a home warranty is usually between $400 and $600.
e. Repairs or Concessions
If the buyer requests repairs after the home inspection or if you’ve agreed to cover some of the
buyer’s closing costs as part of the negotiations, those costs will be deducted from your
proceeds at closing. The amount will depend on the agreement you’ve reached with the buyer.

4. Who Pays Closing Costs?
Closing costs are typically split between the buyer and seller, but who pays for what can vary
depending on local customs and the terms negotiated in the purchase agreement. Here’s a
general breakdown of how costs are usually divided:
Buyers Typically Pay For:
● Loan origination fees
● Appraisal and inspection fees
● Title insurance (for the lender)
● Attorney fees (if applicable)
● Homeowners insurance and property taxes
● Recording fees
Sellers Typically Pay For:
● Real estate agent commissions
● Title transfer fees
● Outstanding property taxes
● Repairs or concessions (if agreed upon)
Tip: In some cases, buyers can negotiate for the seller to cover a portion of their closing costs,
especially if the seller is motivated to close the deal quickly. This is often referred to as a “seller
concession.”

5. How to Estimate Closing Costs
It’s important to have a clear idea of what your closing costs will be, whether you’re buying or
selling. Here’s how to estimate these costs:
For Buyers:
● Loan Estimate: Shortly after you apply for a mortgage, your lender will provide a Loan
Estimate. This document outlines the estimated closing costs, including loan fees,
insurance, taxes, and other expenses. It’s a good idea to compare Loan Estimates from
multiple lenders to ensure you’re getting the best deal.
● Prepaid Costs: Don’t forget to factor in prepaid costs like homeowners insurance and
property taxes, which can significantly impact the total amount you’ll need at closing.
For Sellers:
● Net Sheet: Your Realtor can provide you with a seller’s net sheet, which outlines the
estimated proceeds from the sale after deducting closing costs, commissions, and any
remaining mortgage balance. This gives you a clear picture of how much you’ll walk
away with after the sale.
● Negotiation Considerations: If you’re offering any concessions to the buyer, such as
covering part of their closing costs, be sure to include these in your net sheet to
accurately estimate your final proceeds.

6. Can Closing Costs Be Negotiated?
Yes, closing costs can often be negotiated. While some fees, like government taxes or recording
fees, are set in stone, many other costs are open to negotiation. Here are a few tips for reducing
your closing costs:
For Buyers:
● Negotiate with the Seller: In some cases, you can ask the seller to cover a portion of
your closing costs. This is more common in buyer’s markets, where sellers are eager to
close deals.
● Shop Around for Lenders: Different lenders offer different rates and fees. By
comparing Loan Estimates from multiple lenders, you may be able to find one with lower
closing costs.
● Ask About No-Closing-Cost Loans: Some lenders offer loans with no upfront closing
costs. However, these loans typically come with higher interest rates, so it’s important to
weigh the long-term costs.
For Sellers:
● Negotiate Repairs: If the buyer requests repairs after the inspection, you can offer a
credit toward their closing costs instead of making the repairs yourself. This allows you
to control your out-of-pocket expenses while still addressing the buyer’s concerns.
● Review Agent Commissions: While real estate agent commissions are generally set at
0% to 6%, they may be negotiable depending on the market and the specifics of the
sale.

Final Thoughts: Preparing for Closing Costs
Closing costs are an inevitable part of buying or selling a home, but understanding them in
advance can help you avoid surprises and better plan your budget. By working closely with your
Realtor and lender, you can get a clear picture of what to expect and explore opportunities to
negotiate and reduce some of the expenses.

Ready to navigate the closing process with ease? Contact me today for expert guidance on
buying or selling your home, and let’s make sure you’re fully prepared for closing costs every
step of the way!