There are many costs associated with real estate transactions. Some of them are easy to overlook, like closing costs. However, those fees can add up to thousands of dollars. It should always be a consideration when buying and selling a home.
Closing costs are the fees that must be paid when the purchase of a home is finalized. Most of these fees go to the professionals who help to facilitate the transaction. Both buyers and sellers must pay closing costs, and each contributes to a specific one.
Buyer Closing Costs:
First time or not, buyers should know they need to be saving up to purchase a home. They must factor in closing costs, which can add up to 3%-5% of the home’s purchase price and can easily be in the tens of thousands. If a buyer cannot pay these costs out of pocket (possibly because their savings are going towards a down payment), they can finance through lender credits, which lowers upfront costs but increases monthly mortgage payments.
Closing costs for buyers and sellers can be divided into the costs of buying a home and the costs of owning a home. The first category includes fees paid to lenders and third parties for processing paperwork, examining their case, and creating the loan. While the second category includes costs such as property tax and homeowner’s insurance.
These costs vary from lender to lender, so it’s a good idea for buyers to shop around to find a lender with the lowest fees. Some lenders charge borrowers for discount points to get the lowest rates, and others do not. Origination fees, the cost of creating the loan, are often about 1% no matter which lender you choose, but even this can vary some by lender and location.
Third Party Fees
While third-party fees are usually relatively low, they can add up to thousands of dollars. These include the cost of appraisals, credit reports, and mortgage insurance. Some of these fees can vary between companies and can be shopped for, while others are fixed.
Property Taxes, Homeowners Insurance, and HOA dues are all costs associated with homeownership. These fees are usually assessed annually and stored in escrow, a temporary bank account that ensures the money is available when it’s needed. Of course, there are also fees associated with an escrow account itself.
Seller Closing Costs:
Sellers aren’t off the hook when it comes to closing costs. Many sellers spread out 6%-10% of the price for the property in closing costs. This goes towards the agent’s commission, Title Insurance, and other taxes and fees.
Agent Commissions are usually the highest closing cost for sellers. The seller often pays the commission for both their listing agent and the buyer’s agent. 3% of the home’s sale price usually goes to each, adding up to a 6% cost to the seller. It can sometimes be negotiated, such as when your listing agent is also helping you buy a new home, but 3% is relatively standard.
Title insurance protects the lender against unexpected ownership claims to your home. While such claims are uncommon, they can quickly spiral into costly legal disputes if they arise.
Taxes and Fees
Filing and recording fees, as well as transfer taxes, often fall to the seller to pay. The cost of these fees is typically determined by state or local jurisdiction and can thus vary by location. Local laws will sometimes require taxes and fees.
A strategy to make an offer stand out or push for closings is by using closing costs. Closing costs can sometimes be used in negotiation, with either the buyer or seller agreeing to pay specific fees. However, both parties should expect to pay at least several thousand in closing costs, and it is essential to budget with this in mind.
We hope this helps you understand the back end of real estate a little bit more. Don’t hesitate to reach out and ask questions regarding your real estate needs.