Buying or selling a home is one of the largest financial transactions most people will experience in their lifetime. Whether you’re a buyer eager to get the keys to your new home or a seller ready to close the chapter on a sale, it’s crucial to understand the closing costs involved. Having a clear understanding of them can help ensure a smooth closing process.

Read on to learn what buyers and sellers need to know about closing costs.

What Are Closing Costs?

Closing costs are the fees and expenses paid at the end of a real estate transaction — during the closing process — when ownership of the property is transferred. Both buyers and sellers will have specific closing costs they’re responsible for, though the breakdown can vary depending on location, the terms of the sale, and local regulations.

Closing Costs for Buyers

As a buyer, most of the closing costs you’ll pay are related to securing the mortgage, taxes, and transferring the property title. Here’s a look at the most common fees you can expect to encounter:

Loan origination fees

These are the fees your lender charges for processing and underwriting your mortgage loan. This cost usually ranges from 0.5% to 1% of the loan amount and covers the lender’s administrative tasks in creating the loan.

Appraisal fee

Before your lender finalizes the mortgage, they’ll require an appraisal to determine the fair market value of the home. The appraisal fee typically ranges between $300 and $600.

Title insurance

There are two types of title insurance policies involved in a real estate transaction: lender’s title insurance and owner’s title insurance. While they both protect against ownership disputes or defects in the title, they serve different purposes and cover different parties.

Lender’s title insurance is required by your mortgage lender to protect their financial interest in the property. The buyer pays for the lender’s title insurance, but this policy only protects the lender, not the buyer.

Owner’s title insurance, on the other hand, is optional but strongly recommended. It protects the buyer’s ownership rights if future claims against the property arise. 

The cost of title insurance varies depending on the state and the property value. Typically, the combined cost for both lender’s and owner’s title insurance ranges between 0.5% to 1% of the home’s purchase price.

Escrow fees

Escrow fees cover the cost of having a neutral third party manage the transfer of funds and documents during the closing process. (Often, this is the title company conducting the closing.) These fees are generally split between both parties. 

Recording fees

Local governments charge a fee to record the sale of the property and the transfer of the deed. This fee can range from $25 to $250, depending on the municipality.

Prepaid property taxes and insurance

Most lenders require buyers to prepay a portion of the property taxes and homeowners insurance at closing. These payments go into an escrow account to ensure there’s enough set aside for the first few months of homeownership.

Private mortgage insurance (PMI)

If you’re putting down less than 20% on the home, your lender will likely require you to pay for private mortgage insurance (PMI). This can either be a lump sum at closing or part of your monthly mortgage payment.

Discount points (optional)

Discount points are prepaid interest that buyers can choose to pay at closing to lower their mortgage interest rate. One point is equal to 1% of the loan amount and will reduce the interest rate by a small margin.

Closing Costs for Sellers

Sellers are usually responsible for the costs associated with transferring the property’s ownership. These fees usually include:

Real estate agent commissions

One of the largest expenses sellers face is the real estate agent commission. This typically ranges from 5% to 6% of the home’s sale price and is split between the buyer’s and the seller’s agents. While this is often negotiable, it remains one of the primary closing costs for sellers.

Transfer taxes

In most states, a transfer tax is charged when property ownership is transferred. The amount varies widely and may be calculated as a flat rate or a percentage of the sale price. Often referred to as the “grantor tax,” this fee is typically paid by the seller. Additional local transfer taxes may also apply in some municipalities.

Escrow fees

Just like buyers, sellers are usually responsible for half of the escrow fees, which pay for the third-party service that handles the transfer of funds during the transaction.

Outstanding liens or judgments

If there are any outstanding liens or judgments against the property (such as unpaid property taxes or contractor bills), they will need to be settled before the sale can go through. Sellers are responsible for paying off any existing debts tied to the property at closing.

Home warranty (optional)

In some cases, a seller might offer a home warranty as an incentive for buyers. While this is not required, it can help cover the cost of repairs for major systems or appliances within the first year after the sale. Home warranty costs typically range from $300 to $600.

How Much Are Closing Costs?

As a general rule, buyers should expect to pay between 2% and 5% of the home’s purchase price in closing costs, while sellers generally cover 6% to 10% (mainly due to real estate commissions). 

For example, on a $300,000 home, buyers might pay $6,000 to $15,000 in closing costs, while sellers could pay around $18,000 to $30,000.

Can Closing Costs Be Negotiated?

In some cases, buyers and sellers can negotiate who covers certain closing costs. For example, buyers can ask the seller to contribute to closing costs as part of the purchase agreement. This is known as a “seller concession” and is more common in slower markets or when the seller is eager to close the deal.

Closing costs are an essential part of any real estate transaction, and understanding what to expect can help buyers and sellers avoid surprises at the closing table. Being informed and prepared can mean a smoother transaction and a successful closing for both parties. To learn more about the closing process, contact the team at Linear Title & Escrow.