How Much Are Closing Costs? Plus: How To Reduce Closing Costs
How much are closing costs? These fees, paid to third parties to help facilitate the sale of a home, typically total 2% to 7% of the home's purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500.
Now that you have a sense of the ballpark numbers, here's everything home buyers and home sellers need to know about closing costs.
Who pays closing costs, and when?
Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion's share of the load (3% to 4% of the home's price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.
How much are closing costs for buyers?
Home buyers pay the majority of closing costs since many of these fees are associated with the mortgage.
“If you're paying cash for a property, there are still a few closing costs, but they are significantly less,” says Cara Ameer, a Realtor? in Ponte Vedra, FL.
Here are some of the fees home buyers should brace themselves to pay:
- A loan origination fee, which lenders charge for processing the paperwork for your loan.
- A fee for running your credit report.
- A fee for the underwriter, who assesses your credit worthiness.
- A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.
- A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.
- A fee for a title search to unearth any liens on the property that could interfere with your ownership of it.
- A survey fee if it's a single-family home or townhome (but not condos)
- Taxes, also called stamp taxes, on the money you've borrowed for your home loan.
How much are closing costs for sellers?
Here are the closing costs that sellers are typically responsible for:
- A closing fee, paid to the title company or attorney's office where everyone meets to close on the home.
- Taxes on the home sale.
- A fee for an attorney, if the home seller has one.
- A fee for transferring the title to the new owner.
While this doesn't seem like much compared with what home buyers have to cough up, keep in mind that sellers typically pay all real estate agents' commissions, which amount to 4% to 7% of the home's sales price. So, no one sneaks through a home closing scot-free.
Why there's no such thing as typical closing costs
The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.
“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called ‘flip taxes’ that condos charge sellers.”
Texas has the highest closing costs in the country, according to Bankrate.com. Nevada has the lowest.
How to estimate closing costs
To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your real estate agent, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their real estate agent outlining their own costs.)
Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you're already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.
How to reduce closing costs
While there's no way for you to outright dodge closing costs, there are ways you can pay vastly less.
Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender's good-faith estimate (GFE) for an itemized list of fees. You can also use your GFE to comparison shop with other lenders.
Here are some ways to circumvent the added expenses:
1. Look for a loyalty program. Some banks offer help with their closing costs for buyers if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for preferred reward members. It's the bank's way of offering a reward for being a customer.
2. Close at the end the month. One of the simplest ways to reduce closing costs for buyers is to schedule your closing at the end of the month. If you close at the beginning of the month, say March 6, you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.
3. Get the seller to pay. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing cost credit. It's a way to seal the deal—and a tax-deductible expense for the seller. Don't expect this to happen much in hot markets where inventory is scarce (which is almost everywhere these days).
4. Wrap the closing costs into the loan. You're already borrowing probably hundreds of thousands of dollars—why not tack on a few thousand more? Lenders charge more for this, but if you don't have the cash, it's a way to get into the house with less cash upfront.
5. Join the army. Military members have closing-cost benefits that are often overlooked. Service members and veterans may qualify for funds to help them purchase a home. These benefits are not limited to the VA loan. The key is to do the necessary research to make sure you get everything you are entitled to. Visit usmhaf.org for more information.
6. Join a union. AFL-CIO members can get help purchasing or refinancing a home with closing-cost discounts and rebates from the Union Plus Mortgage program.
