Selling Your Home? Here’s What You Need to Know About Closing Costs

Selling your home can be an exciting moment, but it can also be overwhelming and confusing, especially when you reach the closing stage. Closing costs can be one of the most significant expenses during the home selling process, and it’s crucial to have a clear understanding of what they are, how they’re calculated, and whether they can be negotiated to help save you money.

In this post, we’ll explain what you need to know about closing costs, including common misconceptions, ways to lower your expenses, and a detailed breakdown of what to expect. Whether you’re a first-time seller or a seasoned pro, this information will be invaluable as you prepare to close on your property.

Here are some key statistics to set the stage:

• Closing Costs Range: Closing costs can range from 2% to 5% of the home’s purchase price.
• Average Costs in 2021: Closing costs averaged $6,905 as of 2021, according to real estate data firm ClosingCorp. This includes fees paid by both the buyer and seller.
• Highest and Lowest Costs: Washington, D.C. buyers and sellers pay the highest average closing costs, at $29,888. Missouri buyers and sellers pay the lowest, at $2,061.
• Refinancing Costs: You’ll also pay closing costs when refinancing your mortgage. Those costs are much lower: an average of $2,375 in 2021.
• Highest Closing Costs: Some specific markets have notably high closing costs, such as Vineyard Haven, Massachusetts, averaging $28,724, and Bremerton-Silverdale-Port Orchard, Washington, averaging $16,003.

Debunking Common Myths About Closing Costs

With the many items related to closing costs, misinformation can lead to confusion and costly mistakes. Many homebuyers and sellers fall prey to myths that can affect their financial decisions during the home-buying process. Let’s debunk three of the most common misconceptions about closing costs.

Common Myth: Your Down Payment Automatically Includes Your Closing Costs

Closing costs included in the down payment is a widely accepted misconception, but your down payment and closing costs are separate expenses in the home-buying process. The down payment is the upfront amount you pay towards the home’s purchase price, typically 5% to 20%, depending on the loan type and your financial situation. On the other hand, closing costs cover the fees and taxes associated with finalizing the mortgage. These include appraisal fees, title insurance, and loan origination fees, among others. It’s crucial to budget for both of these costs when planning to buy a house.

Common Myth: You Can Roll All Closing Costs into the Loan

Many buyers are tempted to finance closing costs by rolling them into the mortgage loan. Some lenders may allow certain costs to be rolled into your loan, but not all expenses are eligible. Note while this may seem like an attractive option, it can cause problems down the road. When you roll your closing costs into the loan, you pay interest on those fees. This increases your overall cost of borrowing and puts you at risk of being underwater on your home if real estate values drop.

Common Myth: Closing Costs Are Non-Negotiable

Another widespread belief is that closing costs are set in stone and cannot be negotiated. However, this is not always the case. Some fees, such as lender charges and title services, may be negotiable. Reviewing the Loan Estimate and asking questions about specific fees is essential. Shopping around and comparing offers from different lenders can also help you find the best deal. Remember, every dollar saved on closing costs is a dollar you can invest elsewhere in your new home.

Understanding these myths and their realities is essential for anyone involved in a real estate transaction. By being informed and asking the right questions, buyers and sellers can confidently navigate the closing process and avoid unnecessary expenses.

Closing Costs for Sellers: What You Need to Know

Selling a home involves various expenses that the seller must cover. These closing costs can significantly impact the net proceeds from the sale. Understanding what these costs entail and how they are calculated is crucial for sellers to budget accurately and negotiate effectively.

Here’s a breakdown of typical closing costs that sellers may encounter:

• Real Estate Agent Commissions- This is often a seller’s most significant closing cost. It’s the fee paid to the seller’s and buyer’s real estate agents. Usually, it ranges from 5% to 6% of the home’s selling price.
• Transfer Taxes- These are taxes imposed by the state, county, or municipality on transferring the title of real property. Note these vary in cost depending on geographic location.
• Title Insurance- This protects the lender and owner against lawsuits or claims against the property resulting from disputes over the title. The cost is usually approximately $550.
• Escrow Fees- Fees paid to the escrow company for facilitating the closing. Cost ranges from $350 to $1,000.
• Attorney Fees- Fees paid to an attorney to review the closing documents on behalf of the seller.
• Outstanding Amount Owed on Mortgage- The remaining balance of the mortgage must be paid off at closing.
• Prorated Property Taxes– The portion of the current year’s property taxes that the seller must pay.
• Other Miscellaneous Fees- This may include fees for home warranties, home inspections, and other services related to the closing process.

Closing costs can add up to around 3% – 5% of the loan amount, but the national average for closing costs is about 1.8% of a home’s sale price. The average closing costs for a single-family home in the U.S. are $6,905.

Closing Costs for Buyers: What You Need to Know

Buyers have responsibilities as well when it comes to closing costs. Understanding these costs is crucial to budget accurately and ensure a smooth closing. Here’s a comprehensive list of typical closing costs that buyers may encounter:

• Application Fee- Fee charged by the lender to process a mortgage application.
• Attorney Fees– Varies by location and complexity of the transaction.
• Loan Origination Fee- Typically 1% of the loan amount.
• Appraisal Fees- A fee to assess the home’s fair market value, averaging $450.
• Processing Fee or Underwriting Fee- Administrative costs, averaging $450.
• Credit Report Fees- A charge to pull credit reports, averaging $35.
• Home Inspection Fees- Ranges from $300 to $500 for a professional inspection.
• Escrow and Signing– Costs associated with escrow services averaging $450.
• Recording Fees- A fee the city or county charges, averaging $110.
• Title Search Fee and Title Insurance- Fees for title services range from $300 to $2,500.
• Flood Determination and Monitoring Fee- A fee paid to a certified flood inspector.
• Homeowners Insurance- Evidence of a prepaid homeowners insurance premium.
• Lead-based Paint Inspection- A fee paid to a certified inspector to check for dangerous lead paint.
• Pest Inspection- This covers the cost of a professional pest inspection.
• Points or Discount Points- An optional, upfront payment to the lender.
• Prepaid Interest- Interest that accrues on a loan between closing and the first payment.
• Private Mortgage Insurance (PMI)– Required with less than a 20% down payment.
• Property Tax– All local property taxes incurred within 60 days of the purchase.
• Transfer Tax- Tax levied by the state or local government to transfer the title.

Costs for both the buyers and sellers closing cost items can vary widely depending on the location, the value of the property, and the specific agreements made between the buyer and seller.

How To Calculate Closing Costs

If a seller is involved in a home transaction, they can expect to receive a closing statement, also known as a settlement statement, as the closing date approaches. This document, prepared by the title company or escrow company handling the sale, provides a detailed breakdown of all the closing costs involved. It gives sellers a comprehensive understanding of the financial aspects of the transaction. It gives them ample time to review and prepare the necessary funds for a smooth, stress-free closing process. Additionally, sellers can consider contacting professionals to get estimates and speaking with a real estate agent for further assistance.

If a buyer is financing the home purchase, they should receive a mortgage loan estimate from the lender shortly after they apply for the mortgage. This estimate is provided on a standard form that itemizes all the closing costs involved, giving the buyer a comprehensive understanding of the financial aspects of the transaction.

Online calculator tools help buyers and sellers determine their closing costs. Using these calculators can provide a better understanding of the financials involved in the transaction and give them insights on how to reduce or negotiate certain fees.

How Sellers Can Lower Closing Costs

Understanding the fees and exploring opportunities to reduce them can lead to substantial savings. Here are some strategies that sellers can employ to lower their closing costs:

• Negotiate with the Buyer- Sellers can offer incentives such as a quicker closing date or leaving behind certain appliances to entice buyers to cover some closing costs. Sometimes, sellers and buyers can agree to split certain closing costs, such as escrow fees.
• Shop Around for Services- Sellers can shop for title insurance and escrow services to find the best rates. If an attorney is required, comparing fees from different legal professionals can save money.
• Understand and Challenge Unnecessary Fees- Sellers should carefully review the closing statement and question any unfamiliar or unnecessary fees. Some fees may be negotiable with the service providers, such as escrow or title companies.
• Offer to Pay a Flat Fee Commission- Some real estate agents may be willing to accept a flat fee commission rather than a percentage of the sale price, potentially saving the seller money.
• Utilize a Real Estate Attorney (if applicable)- In some states, utilizing a real estate attorney instead of an agent can lower costs. An attorney may charge a flat fee for services, which could be less than a traditional real estate commission.
• Consider a For Sale By Owner (FSBO) Approach- Selling the property without a real estate agent means sellers can avoid paying agent commissions altogether. However, this approach requires significant effort and knowledge of the selling process.
• Time the Sale Wisely- Scheduling the closing at the end of the month can reduce the amount of prepaid interest the seller must pay.
• Offer a Home Warranty- Offering a home warranty can build buyer confidence and may allow the seller to negotiate more favorable terms regarding other closing costs.
• Utilize a Competitive Market- As illustrated in the earlier case study, a seller’s low inventory market can give the seller more negotiating power.

Bottom Line

Sellers must consider closing costs’ impact on profits. Negotiate strategically to minimize costs and maximize earnings. Real estate professionals can provide valuable guidance to navigate complexities and optimize negotiations. Be proactive, reduce costs, maximize profits and achieve your desired outcome. Contact a trusted professional today.

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