Real Estate Closing Costs (Everything You Need to Know)

What Are Closing Costs in Real Estate?

Closing costs in real estate refer to the fees and expenses paid to close a real estate transaction.

Typically, both buyers and sellers pay closing costs. Costs refer to various expenses, including loan fees, title insurance, appraisal fees, and attorney fees.

Some specific costs you’ll come across include:

• Loan origination fee: This covers the cost of processing your loan application.
• Title insurance: This protects the lender and the buyer against any ownership disputes or title defects.
• Appraisal fee: This is paid to an appraiser to determine the market value of the property.

We’ll detail more closing costs further below.

How Much Are Closing Costs?

Let’s take a look at how closing costs differ by state.

In the table below, you’ll see the average closing costs for home purchases versus refinancing across several states.

Average Closing Costs By State

But who’s responsible for these closing costs?

Let’s find out below.

Who Pays Closing Costs?

Here’s who’s responsible for paying closing costs:

Closing costs paid by the buyer

When it comes to closing costs paid by the buyer, there are a few common fees to keep in mind.

These may include the following:

• Underwriting fee
• Discount points
• Title search fee
• Origination fee
• Title insurance
• Appraisal fee

The costs for each fee can vary, but it’s helpful to have a ballpark estimate.

For example, appraisal fees can range from $300 to $800 or more. Fees depend on the value and condition of the property, the home size, and how detailed the appraisal is.

Title search fees might be around $100 to $250 — though larger houses and unique buildings may cost much more.

It’s also worth noting that in some cases, sellers may offer concessions to help offset these costs.

Closing costs paid by the seller

When it comes to closing costs paid by the seller, there are a few expenses to keep in mind.

Some common ones include:

• Prorated property taxes
• Realtor commissions
• Transfer taxes
• Attorney fees

Specific costs can vary depending on location and other factors, but it’s important to consider them when negotiating a deal.

The maximum percentage allowed for the seller to contribute toward closing costs varies depending on the loan program.

For instance:

It’s always a good idea to consult with a real estate professional or lender for more accurate and up-to-date information.

Seller concessions

Seller concessions can be a powerful negotiation tool, especially in a buyer’s market.

This is when a seller pays for a part of the buyer’s closing costs to alleviate some financial burden for the buyer.

To negotiate seller concessions, consult with your real estate agent. They’ll assess the current market conditions and offer a proposal to the seller on your behalf. You’ll then be able to accept, reject, or further negotiate concessions.

Pro tip: A good time to ask for a seller’s concession occurs when something turns up in the home inspection report. For example, if the HVAC and water heater are at the end of their lifespan, you might ask for the cost to replace the units as a “seller credit.”

What is included in closing costs?

Closing costs include a variety of expenses that you need to consider when buying or refinancing a home. These are typically upfront costs, lender fees, and other miscellaneous charges.

For instance …

Upfront costs may include items like the appraisal fee, inspection fee, and earnest money deposit (usually 1–2% of the purchase price). These are payments made before closing to ensure the property’s condition and secure the purchase agreement.

Pro tip: If you’ve found your dream home, agreeing to put down a larger earnest money deposit can sweeten your offer. The best part is the deposit goes towards your down payment if the offer is accepted.

If not, the deposit is refunded to you. However, always clarify these terms in the purchase and sale agreement.

Lender fees typically include charges such as the origination fee, discount points, credit report fee, and underwriting fee. These are associated with the processing and approval of your loan application.

Other costs may include title insurance fees, attorney fees, escrow fees, recording fees, and property tax prorations. Specific charges vary based on factors such as the property’s location and local regulations.

It’s also worth noting that there may be differences in closing costs between home purchases and refinancing.

For instance, when refinancing, charges like title insurance and property transfer may be reduced or excluded since there’s no change in ownership.

Property transfer charges can also vary based on the state and municipality you’re in. It’s important to research and understand the specific regulations and fees applicable to your area.

Remember to consult with your lender, real estate agent, or attorney for a detailed breakdown of closing costs specific to your transaction.

And speaking of detailed closing costs …

Let’s define some common real estate closing costs:

Application Fee

This fee covers the cost of processing your loan application.

Appraisal

An appraisal is an assessment of the property’s value conducted by a professional appraiser to determine if it aligns with the sale price. The average cost for a home appraisal is between $350 and $600.

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Attorney Fees

Attorney fees cover the legal services provided by an attorney to ensure a smooth and lawful closing process.

Closing Fee

You’ll pay a closing fee (also known as a settlement fee) to the closing agent or escrow company for their services in facilitating the transfer of ownership. The cost, on average, is 1% of the sales price of the house.

Courier Fee

This fee covers the cost of transporting important documents between parties involved in the transaction.

Credit Reporting Fee

The credit reporting fee is charged to obtain and review your credit report during the loan approval process. You can expect to pay around $70 for this fee.

Discount Points

Discount points are an optional fee paid upfront to reduce the interest rate on the loan, effectively “buying down” the rate.

Escrow Funds

These funds are typically held in an escrow account to cover future expenses, such as property taxes and homeowners insurance.

FHA Mortgage Insurance

FHA loans require mortgage insurance payments to protect the lender in case of default.

Flood Certification

This fee covers the cost of determining if the property is in a federally defined flood zone.

Homeowners Association Transfer Fee

This fee is charged when ownership of a property within a homeowners association (HOA) gets transferred.

Homeowners Insurance

Lenders often require proof of homeowners insurance to protect their investment in the property. For reference, the average homeowner’s insurance is about $147 per month. Note: this figure varies depending on home location and value.

Loan Origination Fee

Lenders charge a loan origination fee for processing and originating the loan. Expect to pay anywhere from 0.5% to 1% of the total loan amount.

Lender’s Title Insurance

This insurance protects the lender against any issues with the property’s title, ensuring a clear and marketable title.

Lead-Based Paint Inspection

This fee covers the cost of inspecting for the presence of lead-based paint, especially in older properties.

Owner’s Title Insurance

Owner’s title insurance protects the buyer against any unforeseen issues with the ownership of the property.

Pest Inspection Fee

This fee covers property inspection costs for pest-related issues, such as termites, for an average cost of $100.

Prepaid Daily Interest Charges

These charges cover the interest cost from the closing date to the end of the month.

Private Mortgage Insurance (PMI)

PMI is a type of insurance you’ll need if you have a conventional loan and made a down payment of less than 20%. This insurance type protects the lender.

Property Tax

Property taxes are prorated based on the closing date and cover your share of the taxes for the time the seller owned the property.

Rate Lock Fee

If you choose to lock in your interest rate, the lender may charge this fee to secure that rate.

Recording Fee

This fee is paid to the county or local government for recording the deed and other mortgage documents, typically costing around $100.

Survey Fee

A survey fee covers the cost of verifying the property’s boundaries and identifying any encroachments.

Tax Monitoring And Tax Status Research Fees

These fees cover the cost of researching the property’s tax history and monitoring tax payments.

Title Search Fees

Title search fees are charged to verify the property’s ownership history and ensure there are no liens or other claims against it.

Transfer Tax

State or local governments impose transfer taxes when property ownership is transferred.

VA Funding Fee

This fee is specific to VA loans and funds the VA loan program, which helps eligible veterans and service members secure financing.

Now that you’re clear on the definitions, let’s answer a few more frequently asked questions about real estate closing costs.

FAQ 1: Who Pays a Realtor’s Commission at Closing?

The seller typically covers the realtor’s commission at closing.

Commission is usually calculated as a percentage of the final sale price, commonly split between the seller’s agent and the buyer’s agent.

The percentage can vary but usually ranges from 4% to 6% of the sale price. The national US average was about 5.5% in 2022.

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The seller agrees on a commission percentage with their listing agent when they sign the listing agreement.

The agreement also outlines how the realtors involved in the transaction will split the commission. The seller’s agent and the buyer’s agent will each receive a part of the commission based on their predetermined arrangement.

It’s also important to note that while the seller covers the cost of the commission, it ultimately comes from the proceeds of the sale.

In other words, the commission deducts from the seller’s proceeds at closing. Buyers, on the other hand, generally don’t pay the realtor’s commission directly.

Keep in mind that commission percentages and arrangements can vary. Consult with your real estate agent for specific details related to your transaction.

FAQ 2: Can You Negotiate Closing Costs?

Negotiating closing costs can be a smart strategy to help reduce your expenses.

Here are some ways you can negotiate these costs to your advantage:

Consider shopping around for lenders

Different lenders may offer different rates and fees. Don’t hesitate to ask lenders if they can waive or reduce certain fees.

Schedule the closing at the end of the month

End-of-month closings can help minimize prepaid interest expenses and reduce how many days you need to pay interest on your loan.

Ask for a lower home price or closing costs credit

Consider negotiating with the seller to lower the purchase price of the home — which indirectly reduces your closing costs. You can also ask the seller to provide a closing costs credit to cover some of your expenses.

Look into down payment assistance programs

Down payment assistance programs help eligible buyers with closing costs and down payment funds — potentially reducing the upfront expenses you need to cover.

Remember, negotiation is all about communication and finding win-win solutions. Discuss options with your real estate agent or lender to determine the best approach for negotiating closing costs in your specific situation.

FAQ 3: How Do You Calculate Closing Costs?

There are several factors to consider when calculating closing costs.

These may include loan payoff costs, title fees, and commission rates. Other elements that can impact closing costs include the property’s value and your state’s specific requirements.

To get a comprehensive view of your closing costs, consider using a home sale calculator. This tool helps you estimate your net proceeds by inputting expenses such as moving costs, repairs, and agent fees.

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Have a Confident Closing

Negotiations require research, communication, and working with professionals you trust — especially your real estate agent.

When working to lower closing costs, your trusted real estate agent can help you:

• Work with the seller to negotiate a lower home price
• Request a credit for closing costs from the seller
• Apply for a down payment assistance program
• Schedule the closing at the end of the month
• Negotiate seller concessions
• Shop around for lenders

By doing your due diligence and collaborating with professionals, you can feel confident and empowered throughout the closing process.

Best of luck with your home purchase!