Closing Costs are the final cap to every real estate transaction. If you are looking to buy a home, you might have heard us (or your agent) mention that we can ask the seller to pay for closings costs. Or if you’re a seller debating multiple offers on your home, you might be inclined to choose the offer that doesn’t ask you to pay for closing costs.
But what exactly does that mean? If you remember back to a previous post in our buyer series, closings costs are fees paid at the end of the transaction by the seller, the buyer, or both. Closing costs include taxes, lender expenses, escrow fees, and commissions.
So let’s break this down. Escrow fees include expenses such as transfer taxes, title insurance, notary fees, and other costs incurred during the closing. The title company (where the closing is typically held) can provide an itemized list of each fee and its associated cost. Commissions are the portion that is paid to the buying and selling agents. Commissions are typically 6% of the transaction. Lender expenses are the price of obtaining a mortgage and appraisal. Homeowner’s insurance is always a must. In most deals, buyers pay for one year of insurance up front. This will help cover unexpected costs or surprises you may encounter with your new home (i.e. the HVAC unit breaks and need servicing, the hot water heater dies and needs replacing).
While this can seem like a lot, don’t worry. Closing costs are on average 2 – 5 % of the purchase price. Again, the title company, your agent, or the lender can explain all the final costs a few days before the closing. You will be provided with a closing disclosure statement which details who pays what during your transaction on closing day or a few days prior. It will also look like a balance sheet with an itemized list of each item and what you are paying.
Closing costs can be negotiable…to a certain extent. Fees for the title search are necessary, because you don’t want to purchase a home unless it has a clear title. And as they say, the only things that are guaranteed in life are death and taxes, so you won’t be able to save costs on taxes. You can, however, shop around for a mortgage and reduce the loan origination fees. Scheduling your closing on the last day of the month can help as well since your loan interest is billed per diem. So by closing at the end of the month, you would pay interest only for that day. The final way to save on closings costs is to make your purchase with cash. You’ll still be responsible for costs of the appraisal, home inspection, escrow fees, etc., but you’ll save money on the loan costs.
At the end of the day, closings costs are here to stay. But knowing what they are and how they affect your transaction makes the process easier. Always look for ways to negotiate costs down – your agent can help you tackle this. Good luck! Now you can walk into your closing like a professional!