How Much Are Closing Costs?

How Much Are Closing Costs
by John Carlucci - May 16, 2023

One surprising statistic in the world of real estate is that the average homebuyer pays between 2% and 5% of their home's purchase price in closing costs. So, how much are closing costs really? And who is responsible for paying them? 

As you navigate the home buying or selling process, understanding these costs and how they can impact your bottom line is critical. This often-overlooked aspect of real estate transactions can affect how much you'll need to save and how you negotiate your contract. 

This guide will not only break down what closing costs are, but will also provide strategies to estimate, save for, and potentially reduce these costs. So, whether you're buying or selling, you can be prepared for the financial implications of your big move.

Unraveling the Mystery: What Are Closing Costs?

When it comes to buying or selling a house, you may come across the term 'closing costs.' But what exactly are they? 

Simply put, closing costs refer to the additional expenses incurred by buyers and sellers during the finalization of a real estate transaction, surpassing the property's purchase price. These costs are a crucial part of the home buying and selling process.

The term 'closing' refers to the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are sustained by both parties and include many fees that must be paid at this time. They can include loan origination fees, appraisal fees, title insurance, and more.

Buyers' closing costs might include loan-related fees, property inspection charges, and upfront costs of homeowners' insurance. On the other hand, sellers' closing costs can include fees for property deed transfer, any necessary home repairs, and real estate agent commission.

How Much Are Closing Costs? A Closer Look

Now that we've defined what closing costs are, it's time to dive into how much they might amount to. Remember, these costs vary significantly depending on a variety of factors, including the property's location, the type of property, and the details of the real estate transaction.

Typically, closing costs run between 2% and 5% of the home's purchase price. For example, if a home is sold for $250,000, the closing costs could range from $5,000 to $12,500. This range can seem broad, but it's due to the many factors that can influence the final total.

For instance, let's consider the buyer's perspective. Buyers' closing costs can fluctuate depending on the type of mortgage they choose, their credit score, and even the time of the year. 

For instance, if the interest rate on their mortgage is high, their loan origination fee may be higher. Also, if they close at the end of the month, they can save on per diem interest.

From the seller's point of view, sellers' closing costs can be impacted by the real estate market's status - whether it's a buyer's or a seller's market - and the agreed-upon contract terms. 

For instance, if the market is hot, they might be able to negotiate so that the buyer covers more of the closing costs. Conversely, in a buyer's market, the seller may need to cover a larger proportion of the closing costs to make the sale.

Given all these factors, it's essential to get an estimate of your closing costs as early as possible in the transaction. As the buyer, your lender is required to provide you with a Loan Estimate within three business days of your loan application, which should give you a good idea of what your closing costs will be.

Who Foots the Bill: Who Pays Closing Costs?

Let's tackle a crucial question in the home-buying process: Who pays closing costs? As we've previously discussed, closing costs are a necessary part of finalizing a real estate transaction. But are they the responsibility of the buyer, the seller, or both? 

The answer can be complex, as it often depends on the specific circumstances and negotiations between the two parties.

Generally, both buyers and sellers have their own set of closing costs to pay. Buyers' closing costs tend to be higher and include charges such as loan origination fees, appraisal fees, and upfront homeowners' insurance costs. Sellers, meanwhile, have expenses like the real estate commission and fees for transferring the property deed.

The Realtor Fees Question: Who Pays?

But what about realtor fees? Who pays realtor fees? Typically, the seller pays the realtor fees, which usually make up a significant portion of the sellers closing costs. These fees are essentially the commission that realtors earn for their services, and they're usually a percentage of the final selling price of the home.

The standard realtor commission is about 5% to 6% of the home's selling price, split between the seller's agent and the buyer's agent. However, like many aspects of a real estate transaction, this can sometimes be negotiated. In some cases, sellers may negotiate a lower commission, or buyers may agree to cover a portion of these fees, although this is less common.

Closing Costs: An Area for Negotiation

But while it's customary for the seller to cover the realtor fees, other closing costs are often more of a grey area and can be a point of negotiation between the buyer and the seller. For example, in a buyer's market, where the number of homes for sale exceeds the number of buyers, a seller may agree to pay a portion of the buyers' closing costs to incentivize a sale. This is known as seller concessions.

On the flip side, in a seller's market where demand outstrips supply, buyers may offer to pay a portion of the sellers' closing costs to make their offer more appealing. While these scenarios aren't the norm, they illustrate how the question of "Who pays closing costs?" doesn't have a one-size-fits-all answer.

The Role of Local Customs

To further complicate things, local customs can also play a part in who pays what. In some areas, it's customary for the seller to cover certain fees, while in others, those fees might typically be the buyer's responsibility.

The Importance of Negotiation and Understanding

In the end, who pays what in closing costs largely comes down to the specific agreement between the buyer and seller. This is why it's so important for both parties to understand their potential closing costs and be prepared to negotiate.

Navigating the Numbers: How Can You Estimate Your Closing Costs?

Understanding your potential closing costs is an important step in the home buying or selling process. But how can you estimate these costs? Thankfully, there are resources and tools available to help.

For Buyers

As a buyer, your lender plays a significant role in estimating your closing costs. Upon applying for a mortgage, your lender is required to provide you with a document called a Loan Estimate. This document, given within three business days of your application, breaks down the estimated costs you'll likely face at closing.

The Loan Estimate is a powerful tool, as it not only provides a detailed estimate of buyers' closing costs but also gives you a clearer picture of the total cost of your mortgage. It includes information like your interest rate, monthly mortgage payment, and the total closing costs.

It's worth noting that these are estimates. The actual costs may vary, but this document gives you a good starting point for understanding what you may need to pay.

For Sellers

As for sellers, estimating closing costs can be slightly different. Sellers can work with their real estate agent to get a rough idea of their potential closing costs. This often includes fees like the real estate commission, transfer taxes, and any potential repair costs needed to sell the home.

A Closing Cost Calculator Can Help

In addition to the resources above, online closing cost calculators can also be beneficial for both buyers and sellers. These tools allow you to input information like your home's price, your location, and your down payment amount, and they'll generate an estimated range of your potential closing costs.

Preparing Your Pocket: How Much Should You Save for Closing Costs?

Now that you've estimated your closing costs, you might be wondering how much to save for closing costs. The answer is somewhat straightforward: Ideally, you should save at least the amount estimated for your closing costs.

For Buyers

For buyers, this means setting aside funds equivalent to the estimated closing costs provided by your lender in the Loan Estimate. Remember, these are estimates, and costs can sometimes end up being higher than initially anticipated. Therefore, it's wise to save a little extra.

Consider, for example, that your estimated buyers' closing costs are $6,000. In this case, it would be prudent to save around $7,000 or $8,000, to account for any unexpected expenses that might arise.

For Sellers

For sellers, the amount to save can depend on several factors. Sellers closing costs often include the real estate agent's commission, which is usually a percentage of the home's selling price.

Sellers may also have other fees to consider, such as transfer taxes or home repair costs. Therefore, it's a good idea to save at least the estimated closing costs, plus a bit extra for unexpected expenses.

A Savings Strategy

In both cases, it's helpful to start saving as early as possible. You can do this by setting aside a certain amount of money each month specifically for closing costs. This strategy can help spread the financial impact over a longer period and make it more manageable.

Minimizing the Monetary Impact: Can Closing Costs Be Reduced or Avoided?

One of the most common questions about closing costs is whether they can be reduced or even avoided. While it's generally not possible to completely avoid closing costs, there are strategies that both buyers and sellers can employ to potentially reduce these expenses.

Negotiation Is Key

Firstly, negotiation can play a significant role in reducing closing costs. Both buyers and sellers have the option to negotiate certain fees with their lender or real estate agent. For instance, as a buyer, you might be able to negotiate a lower loan origination fee with your lender.

On the seller's side, sellers can potentially negotiate lower commission rates with their real estate agent. While this isn't always possible, it's worth discussing with your agent, especially in a hot market where homes are selling quickly.

Comparison Shopping

Another way buyers can reduce closing costs is through comparison shopping. Buyers have the right to shop around for certain services, like home inspections or title searches. By comparing prices from different providers, buyers can potentially save money and reduce their overall closing costs.

Seller Concessions

Additionally, buyers can negotiate for seller concessions, where the seller agrees to pay a portion of the buyers' closing costs. This can be particularly useful in a buyer's market, where sellers may be more willing to make concessions to secure a sale.

No-Closing-Cost Mortgage

For buyers, another option to consider is a no-closing-cost mortgage. This type of mortgage essentially rolls your closing costs into the overall mortgage loan, rather than requiring you to pay them upfront. While this can reduce your upfront costs, it's important to note that it often results in a higher interest rate or overall loan balance.

Closing at the End of the Month

Finally, timing can also help reduce some of the daily accruing costs, such as prepaid daily insurance charges. By scheduling your closing towards the end of the month, you can minimize these costs, as you'll only need to cover the days remaining in the month.

Take Control of Your Closing Costs

In the ever-changing real estate landscape, being well-informed is key to making sound financial decisions. Understanding how much are closing costs, who pays for them, and how to possibly reduce them can make a significant difference in your real estate journey. We hope this guide has empowered you with the knowledge to navigate this process confidently. 

Ready to take the next step in your real estate journey? For more insights and advice on real estate financing, delve into our Real Estate Financing section.

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