As the saying goes, "there's no such thing as a free lunch," and when it comes to buying a home, closing costs are an unavoidable expense. These costs can add up quickly and can be a significant burden on homebuyers, particularly first-time buyers. However, some believe it may be possible to avoid closing costs entirely.
Closing costs are a standard part of the home buying process and typically include fees associated with services such as appraisal, title search, and loan origination. While it may be difficult to avoid closing costs entirely, some strategies can help reduce them.
In this response, we will examine whether it is possible to avoid closing costs and explore some strategies that can help reduce them.
Does the buyer or seller pay closing costs?
Buyers and sellers are typically responsible for closing costs in a real estate transaction. However, the specific amounts can vary based on factors such as the sale price of the property, the type of mortgage, and whether a real estate attorney is required in the state.
It's important to note that the transaction details can also impact who pays for closing costs and how much they pay. For instance, seller concessions can allow the seller to cover some of the buyer's closing costs, and some lenders may offer to cover certain expenses as well.
Ultimately, the specific terms of the transaction are negotiable between the buyer and seller.
What are the buyer’s closing costs?
Closing costs for buyers refer to the expenses incurred while obtaining a home loan, transferring the property title, and other related costs. Typically, buyers pay between 2% to 5% of their loan amount as closing costs, which could range from $4,000 to $10,000 for a $200,000 mortgage.
The amount varies based on several factors, such as the home price, location, and type of loan. The expenses commonly included in buyer closing costs are origination fees, appraisal fees, title search and insurance, upfront mortgage insurance or funding fees, discount points, and escrow.
Other third-party expenses may include credit report fees, attorney fees, recording fees, HOA transfer fees, and home inspection fees. Shopping around for the lowest fees is important to save on closing costs.
Typical buyer closing costs
When purchasing a home, buyers should expect to pay several closing costs, including:
- Origination fee: Typically around 1% of the loan amount, this fee covers the lender's services, such as verifying documents and processing the application.
- Appraisal fee: A home appraisal, which verifies the home's value, usually costs between $500 and $1,000.
- Title search and title insurance: A title search ensures that there are no claims on the property, and title insurance protects against undiscovered claims.
- Upfront mortgage insurance or funding fee: Some types of home loans require an upfront fee to insure or guarantee the mortgage. However, this fee can often be rolled into the loan amount instead of being paid at closing.
- Discount points: These points allow buyers to purchase a lower interest rate by paying an extra fee at closing, typically equal to 1% of the loan amount.
- Escrow: Prepaid property taxes and homeowners insurance premiums will be placed in an escrow account and disbursed as necessary.
Other closing cost considerations
In addition to the common closing costs, it's important to note that your down payment will also be due at closing. This is typically not included as a closing cost, but it may appear on the closing disclosure as part of the cash required to close. Additionally, any earnest money you put into escrow when you made an offer on the house will be credited towards your down payment by the escrow company at closing.
It's worth noting that closing costs can also vary depending on the mortgage lender. While some closing costs are non-negotiable and set by third parties, others are controlled by the lender and can vary significantly.
Common third-party closing costs for home buyers include:
- Credit report fee: This fee covers the cost of pulling your FICO credit score from the three main credit-reporting bureaus.
- Attorney fees: This fee is paid to a real estate attorney for reviewing home purchase agreements. Not all states require this cost.
- Recording fees: These fees are paid to your local government to process records when a property’s ownership changes hands.
- Homeowners association transfer fees: An HOA transfer fee applies only for homes within a planned community governed by an HOA. The seller often pays, but not always. This fee is separate from monthly HOA dues.
- Home inspection: Although not technically a closing cost, it’s common for most buyers to hire a home inspector to assess the property’s condition.
While these third-party fees are not necessarily negotiable, you can save money by selecting a vendor with lower fees. However, county recording fees are usually a set fee charged by your local government and are not negotiable.
When buying a home, shopping for the lowest fees is a simple and effective way to lower your overall closing costs.
What closing costs does the seller pay?
Sellers are also responsible for paying closing costs, but they have less flexibility in negotiating them than buyers. Sellers should prepare to pay out-of-pocket charges associated with the sale of their home.
The largest expense for the seller is usually the real estate agent's commission. Typically, 5% to 6% of the purchase price is paid in commissions to the seller's and buyer's agents. In addition to this, sellers can expect to pay transfer taxes, title fees, escrow fees, and other charges.
While some fees are non-negotiable, such as transfer taxes, sellers may be able to negotiate the commission paid to their real estate agent. It's important for sellers to be aware of these costs and budget accordingly.
In conclusion, closing costs are an important part of home buying that every homebuyer should know. Closing costs refer to the various fees and charges for transferring property ownership from the seller to the buyer.
Buyers typically pay more in closing costs than sellers, and the amount can vary based on factors such as the property's location, the loan's size, and the type of home loan. Buyers can save thousands of dollars on their closing costs by shopping around for the lowest fees and negotiating with the lender and other parties involved in the transaction.
It's important for both buyers and sellers to understand their closing costs and be prepared for them.