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Closing costs refer to the charges and fees that are paid when a house purchase is finalized. Both buyers and sellers pay closing costs to the service providers who help facilitate the transaction. Typically, the buyer's costs include mortgage insurance, homeowner's insurance, appraisal fees and property taxes, while the seller covers ownership transfer fees and pays a commission to their real estate agent. Buyers often negotiate with their new home's seller to cover some of their closing costs.
- What are Closing Costs on a Home Purchase?
- What Closing Costs Do Buyers Pay?
- What Closing Costs Do Sellers Pay?
Closing Costs Explained
When settling the purchase of a home, closing costs are charged to the buyer and seller to compensate the parties involved in funding, approving and insuring the sale. They're not included in the listed purchase price of real estate, typically, and can be a surprise most homebuyers aren't prepared for. For buyers, at least, closing costs can be added to the mortgage amount and repaid in installments. Here are the most common costs:
|Closing Costs for Buyer||Closing Costs for Seller|
Closing costs for homebuyers total around 3% to 5% of the home's purchase price, which can add thousands of dollars to the cost of buying a home. For example, closing costs that amount to 5% of a $300,000 home would cost $15,000. Because buyers tend to use the majority of their savings on their down payment, closings costs are often financed through lender credits, which lower upfront costs in exchange for higher monthly mortgage payments.
Closing Costs for Buyers
For buyers, closing costs can be divided into two main categories: costs associated with buying a home and taking out a home loan; and costs associated with owning a home. In the first category, lenders and third parties charge borrowers a variety of fees to cover the costs of processing an applicant's paperwork, examining their unique case and eventually creating a loan. Buyer closing costs which cover homeownership include property tax, homeowner's insurance and, if applicable, homeowner's association dues. These fees can often be rolled into the total mortgage loan amount and paid through monthly installments.
|Closing Costs for a $180,000 Home||Amount|
|Third Party Fees||$3,870|
|Homeowner Fees and Prepaid Costs||$2,382|
Projected costs from the Consumer Financial Protection Bureau's example Loan Estimate Form, accounting for a $162,000 mortgage ($18,000 down payment, or 10%) and a 3.875% interest rate.
The government requires that lenders list closing costs on every mortgage applicant's Loan Estimate, which lenders provide to potential borrowers within three days of submitting an application. The same closing costs must also be listed on the official Closing Disclosure document, and cannot change except under special circumstances. For example, closing costs might rise if a borrower was deciding between a 30-year and 15-year mortgage and changed their desired term length from the Loan Estimate to the Closing Disclosure.
Below is a breakdown of some of the common fees charged to buyers at closing. While the lists are not exhaustive, as the type and amount of fees charged can vary widely, they are meant to give you an idea of what to expect when buying a home. Because closing costs vary by lender, it's important to shop around and compare the charges on loans that might appear to be otherwise similar.
These closing costs can vary widely from lender to lender. For example, some lenders make mortgage borrowers pay for discount points in order to receive the lowest interest rates, while others do not. As such, borrowers are entitled and encouraged to shop around and compare Loan Estimates from different lenders.
|Fee||Typical Cost||Compensates lender for...|
|Origination fee||1%||Creating loan|
|Application fee||$300||Processing application|
|Discount points||1% of loan for 0.25 rate reduction||Reducing the interest rate (optional)|
|Prepaid interest||Charged per day||The first month's mortgage interest|
Note that prepaid interest is usually only paid for the number of days which are left in the first month's billing period. For example, if you close your mortgage on July 28th, then you'll only have to pay interest for the remaining three days. This daily rate is calculated by dividing the annual interest rate by 365. Accordingly, closing at the end of the month is one way to lower closing costs.
A variety of charges from home inspectors, attorneys and other service providers are charged at closing. Many of these third-party fees are relatively small, but together they can add up to thousands of dollars. As listed on each lender's Loan Estimate, some of the billed services can be shopped for and compared between different companies, while others are fixed. These fees are generally inexpensive and range from $20 to a few hundred dollars.
|Fee||Typical Cost||Goes to company that...|
|Appraisal Fee||$300 to $500||Assesses value of the home being purchased|
|Credit Report Fee||$20 to $30||Provides lender with the borrower's credit report|
|Tax Service Fee||$75||Monitors the borrower's taxes to ensure they're being paid|
|Mortgage Insurance||Upfront cost varies||Will compensate lender if borrower defaults|
These fees include property tax, homeowner's insurance and homeowner's association dues. Although those charges are usually assessed on an annual basis, they are paid and stored in escrow—i.e., a temporary bank account—to ensure that the cash is there when it's time to pay. Mortgage lenders often maintain these escrow accounts for borrowers to minimize the risk of lending money. Some typical homeowner fees include:
- Property taxes, which are determined by your income and local government
- Homeowner's insurance, which varies depending on the insurer and house value
- Homeowner's association dues, which are charged if the house is in area with a homeowner's association
- Escrow account fees, which go towards setting up a holding account for taxes and insurance
Most importantly, it's in the borrower's and lender's interest that the house remains up to date on taxes, as the house is being used as collateral until the mortgage is paid off. This is a priority for lenders because the government has the right to seize the house if taxes aren't paid—and government claims take precedent over lender claims.
Closing Costs for Sellers
The seller's largest cost at closing is usually the real estate commission, which is split between the listing agent and the buyer's agent. This fee ranges from 5% to 8% of the home's sale price, though 6% is standard amount. Sellers also pay fees related to the property title, which is the legal document that secures homeownership. The most common of these fees is the "transfer tax," which transfers the seller's legal property rights to the buyer. Real estate transfer taxes vary according to region. In New York, the transfer tax costs $2 for every $500 of home value, meaning that the seller would pay $800 for a $200,000 home.
In some cases, sellers make concessions and cover some of the closing costs that are charged to the buyer. For example, veterans of the armed forces who finance their home purchase with a VA loan can only pay certain closing costs. To finalize the transaction, a seller might cover some of the fees which veterans aren't allowed to pay, like attorney fees and document fees.