When buying or selling a home, understanding closing costs is crucial. These costs, which can amount to 2% to 5% of the home’s purchase price, are the various fees and expenses incurred during the final stages of a real estate transaction. Both buyers and sellers should be prepared for these expenses to avoid any last-minute surprises. Let’s break down what closing costs entail for both parties.

What Are Closing Costs?

Closing costs are the fees paid at the closing of a real estate transaction when the property’s title is transferred from the seller to the buyer. These costs can include various expenses, such as loan origination fees, title insurance, escrow fees, and more.

Closing Costs for Buyers

Loan origination fees: These are the fees charged by the lender for processing the loan application. They typically range from 0.5% to 1% of the loan amount.

Appraisal fee: The lender typically requires a traditional appraisal to determine the property’s market value. This fee is usually around $600.

Home inspection fee: A home inspection is crucial to identify any potential issues with the property. This cost can range between $300 and $500; however, it varies depending on the size of the home and other factors.

Title insurance: Title insurance protects the buyer (owner) and lender from legal claims against the property. Lender’s title insurance and owner’s title insurance are two different policies. The costs of each can vary, but lender’s policies typically range between 0.5% to 2% of the sale price while owner’s policies are around 0.4% of the sale price. 

Property taxes: Buyers may need to reimburse the seller for any prepaid property taxes at the time of closing. Property taxes vary by local tax rates and other factors.

Homeowners insurance: Lenders often require buyers to purchase homeowners insurance before closing. The cost depends on the property’s value and location.

Closing Costs for Sellers

Real estate agent commissions: Sellers typically pay the commission for both their agent and the buyer’s agent. This is commonly 5% to 6% of the home’s sale price.

Transfer taxes: These are taxes imposed by the state or local government on the transfer of property ownership. The rates vary by location.

Home warranty: Offering a home warranty to the buyer can be an incentive in a competitive market. This can cost around $300 to $600.

Prorated property taxes: Sellers are responsible for property taxes up until the day of closing, so they might need to pay a prorated amount.

Negotiating Closing Costs

While many closing costs are standard, there may be room for negotiation. For instance, buyers can negotiate with the seller to cover some of the closing costs, especially in a buyer’s market. Additionally, lenders might offer to cover some of the closing costs in exchange for a slightly higher loan interest rate.

Understanding closing costs is essential for both buyers and sellers. By being aware of these costs and planning accordingly, both parties can avoid unexpected expenses and ensure a smoother closing process. To learn more, contact the team at Linear Title and Escrow.