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Closing Costs: The what & how much you'll pay

Closing costs are fees and expenses incurred by both buyers and sellers during the final stages of a real estate transaction, typically at the closing or settlement of the property. These costs cover various services and paperwork required to complete the home purchase or sale. Both parties have their respective closing costs, which can vary depending on the location, property value, and negotiated terms. In this article, we will explore the common components of closing costs for buyers and sellers and provide insights into the potential amounts involved.

Buyer's Closing Costs:

Loan-Related Costs:

  • Origination Fee: Charged by the lender for processing the mortgage application.

  • Discount Points: Optional fees paid upfront to lower the interest rate on the loan.

  • Appraisal Fee: The cost of evaluating the property's value by a licensed appraiser.

  • Credit Report Fee: Covers the expense of obtaining the buyer's credit history.

Title and Escrow Costs:

  • Title Search and Title Insurance: Ensures that the property's title is clear and protects against any potential title issues.

  • Escrow Fee: Paid to the escrow company that oversees the closing process and holds funds in a neutral account.

Government Fees:

  • Recording Fees: Paid to the local government for recording the property sale in public records.

  • Transfer Taxes: Taxes imposed by state or local governments on property transfers.

Prepaid Expenses:

  • Property Taxes: Upfront payment of a portion of annual property taxes.

  • Homeowners Insurance: Prepayment for the first year of homeowners insurance coverage.

  • Mortgage Insurance Premium (MIP) or Private Mortgage Insurance (PMI): Required for certain loans with lower down payments.

Seller's Closing Costs

Loan Payoff Costs:

  • Remaining Mortgage Balance: The seller must pay off the remaining mortgage balance on the property.

Real Estate Commission:

  • Typically the largest expense for sellers, this fee is paid to the real estate agent representing the seller.

Title and Escrow Costs:

  • Title Insurance: Covers the buyer in case of any title issues arising after the sale.

  • Escrow Fee: Similar to the buyer's escrow fee, covering the costs of the escrow service.

Government Fees:

  • Transfer Taxes: In some areas, sellers may be responsible for paying transfer taxes.

  • Recording Fees: Paid to record the release of the seller's mortgage lien.

Estimating Closing Costs:

Closing costs can range from 2% to 5% of the property's purchase price for buyers. For sellers, costs can amount to approximately 6% to 10% of the property's sale price. However, these percentages can vary based on local regulations, the property's location, and individual negotiations. It's crucial for both buyers and sellers to review a Closing Disclosure (CD) provided by the lender at least three days before closing. The CD outlines the exact closing costs, ensuring transparency in the final stages of the real estate transaction.

Closing costs are an essential aspect of any real estate transaction and can significantly impact the amount of money buyers and sellers need to budget. Being aware of the various components of closing costs allows both parties to prepare financially for the closing process and avoids any last-minute surprises. As with any significant financial transaction, seeking advice from real estate professionals and lenders can provide valuable insights and guidance to navigate the complexities of closing costs.

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