Buying a home is exciting. Very few things compare to the feeling of having a place to call your own. But anyone who has been through the process knows it does not come cheap.
With all of the fees and expenses associated with the closing or settlement of a real estate transaction, both buyer and seller have money up front to pay. And closing costs can vary dramatically.
Here’s what you need to know about the closing costs you may have to pay when you buy your next home, and how you may be able to avoid closing costs altogether.
What are Closing Costs?
In addition to obtaining financing, there are several steps you need to take to close on a home. At every stage, there are people who come in to perform different services, and each person needs to be paid. These are closing costs.
Costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners’ insurance. The lender is required by law to state these costs in a loan estimate form within three days of a home loan application. Gifts of equity still incur closing costs.
Buyer and seller can see closing cost responsibilities ranging from 3 percent to 5 percent of the total purchase price. Although buyer vs. seller closing costs vary, they are usually predictable. Depending on the market, the seller can be asked to pay for some closing costs instead of the buyer, but it is important to remember that they are already paying around 3-6 percent of the total sale in agent fees and commissions. Buyers may not have much luck asking the seller to absorb additional fees in a seller’s market, but occasionally it is a strategy that does pay off.
Closing costs vary from lender to lender and state to state, but generally include:
- Appraisal costs
- Property taxes
- Loan discount points
- Origination fee
- Title transfer fees
- Private mortgage insurance (PMI)
These costs may be paid outright at closing or, in some cases, built into the loan.
Who Pays Closing Costs?
If you have bought or sold a home before, you know the financial details are much more complex than just the listing price. From inspections to agent fees and everything in between, both buyers and sellers hold financial responsibility for transaction expenses and closing costs — and knowing who pays for what can help ensure a smooth sale.
While some aspects of closing costs can be negotiated into the contract between buyer and seller, certain things are typically paid by one party or the other.
Seller Closing Costs
Closing costs are split up between buyer and seller. While the buyer typically pays for more of the closing costs, the seller will usually have to cover their end of local taxes and municipal fees. The seller generally pays for most of the costs associated with the home itself. In other words, things that need to be done to prepare the home for sale. Additionally, they usually pay the realtor commission for both the buyer and seller’s realtors.
In addition to the closing costs that have already been discussed, there are additional seller costs to keep in mind. Depending on your mortgage company, you may be required to pay a one-time loan repayment fee, so be sure to check the terms of your mortgage before closing. Any last-minute home improvement projects necessary to complete before the new owners move into the house should also be accounted for.
Here is a look at some of the common expenses a seller will have to pay at closing:
- Agent commission
- Transfer tax
- Title insurance
- Prorated property taxes
- HOA fees
- Credits toward closing costs
- Seller attorney fees
- Any escrowed money promised to the buyer
Average Closing Costs for Sellers
Though not technically a closing cost, it is typically the responsibility of the seller to compensate the Realtors representing each side of the deal. That said, most Realtors and real estate agents will charge somewhere in the neighborhood of six percent of the sale price of the house for their services. That means a seller could expect to pay upwards of $30,000 for a Realtor’s help on a home, depending on the final sale price. However, it is worth noting that the agents representing both parties will split the six percent commission. To be clear, sellers will usually have a cost somewhere in the neighborhood of six percent of the sales price.
Buyer Closing Costs
Closing costs for homebuyers typically range from 2% to 5% of the sale price.
Where the seller generally pays to prepare and transfer the home, the buyer is responsible for costs related to ensuring the home is the one they want to buy, as well fees related to obtaining financing.
It may surprise many buyers that a lot of the closing costs stem from the loan they are acquiring to buy the property. As a result, the following list highlights some of the average closing costs for buyers:
- Appraisal Fee
- Inspection Fee
- Loan Origination Fee
- Credit Report Fee
- Attorney Fee
- Prepaid Interest
- Prepaid Insurance
- Title Insurance
- Tax Servicing Fee
- Bank Processing Fee
- Recording Fee
- Notary Fee
Average Closing Costs for Buyer
While the buyer’s list above may seem longer than the seller’s, many of these come at a minimal fee. The buyer’s closing costs are generally between 2 to 5% of the sale price. Be sure to go through each line-item with a mortgage professional to paint a clearer picture of the entire situation.
A buyer should receive a loan estimate form early on in the sale process. This document spells out all the approximate costs the buyer will face when making the purchase, so there are not any surprises at closing. Some buyers use the information on the loan estimate form to shop for different lenders, interest rates and costs.
Who Pays Escrow Fees?
With escrow services designed to help both sides, escrow fees are typically incurred by each side of a respective deal. It is quite common for escrow fees to be split evenly between buyers and sellers. However, it is worth noting that the language of a contract or purchase agreement may be changed or negotiated at any time. As a result, escrow fees may be negotiated by either side of a transaction. Sellers may cover escrow fees as an incentive to the buyer, or vice versa. When all is said and done, escrow fees are usually split between buyers and sellers, but they may also be used as a negotiation chip by either side.
Non-Traditional Closing Costs
Additional costs may come up depending on the results of the inspection or certain loan requirements. These closing costs may include:
- Home Repairs: The home inspection is your opportunity to learn more about the condition of the home. If the inspection uncovers serious problems. In this case, the buyer can back out of the deal, buy the home as-is or ask the seller to make repairs.
- Loan Points: Your interest rate is usually based on your credit score and the market. However, you may have the option to buy down your rate with mortgage points.
- Home Warranty: A home warranty will protect major appliances and systems (e.g. HVAC) within the first year of purchase. This is not required, but may be requested by the buyer or offered by the seller.
How to Save Money on Closing Costs
Not all closing costs are set in stone. There are certain costs that you may be able to negotiate or transfer to reduce out-of-pocket costs and your monthly mortgage payments.
So how can you save on your mortgage closing costs? Here are some helpful tips:
- Shop Around for Better Rates: Although lenders aren’t required to provide an estimate before you apply for a loan, you should be able to get some ballpark figures when it comes to closing costs. Getting quotes from more than one lender is the number one piece of advice when it comes to mortgage shopping.
- Know Which Fees Can Change: Many would-be and current homeowners do not know that certain fees listed on your Loan Estimate are locked in and others can change. If you use a company recommended by your lender, your title services, lender’s title insurance and owner’s title insurance cannot increase by more than 10% at closing.
- Save on Discount Points When Mortgage Rates are Low: Homeowners and buyers have the option to pay discount points in exchange for a lower interest rate. However, experts say paying points may not be worth it when mortgage rates are already low. Speak with your lender about whether or not paying points makes sense based on your situation.
- Shop and Compare Homeowner’s Insurance: The best way to avoid pricier insurance is to shop around. It will reduce your closing costs and save you money long-term on your insurance premiums.
- Ask the Seller to Pay for Some or All Closing Costs: A buyer can always ask the seller to help pay for part or all of your closing costs. If the seller is motivated enough to make the transaction, you may save some money on closing costs in the process.
- Close at or Near the End of the Month: Prepaid interest is one of the fees that come into play when buying or refinancing a home. Closing toward the end of the month can save on prepaid interest.
When Are Closing Costs Due?
Closing costs are due at closing when each party has signed all documents, and the buyer’s money is made available for the payment. Unless you owe more on the property than it is worth, you will not need to bring cash to the closing. The time between listing the property on the market and closing can vary but typically will take a shorter amount of time in the summer and spring.
What Happens at Citrus Heritage Escrow?
Buying a home should be an exciting time in your life. While it is easy to get overwhelmed by all the line items on your loan, a qualified home lender will be there to guide you through every step of the process.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200