Closing costs can be confusing when buying or selling a home. These are necessary costs that come with every real estate transaction. If you plan to buy a home or sell a home, you want to understand what closing costs are and how they work.
What are closing costs?
The fees that go along with purchasing a home are known as closing costs. Some of these fees will be paid to the lender, while others will go to a third party, such as an inspector, title company, or appraiser. These fees will be required to cover the necessary services for funding the loan.
Some closing costs will likely be paid by the buyer and others by the seller.
What is the average amount for closing costs?
Typically, the lender will charge a percentage of the purchase price or the loan amount for the closing costs. This amount will range from about 2% to 5% for the buyer. So, if you have a home that costs $300K, you can expect closing costs to range from $6,000 to $15,000.
The closing costs for the seller will range from about 8% to 10%. This is due to the commission for the real estate agent. For sellers, the average on a $300K home will go from about $24,000 to $30,000.
Buyers will see their closing costs impacted most by the lender and program they choose. Sellers will see this amount impacted mostly by the commission for the real estate agent and any concessions.
When must closing costs be paid?
Most of the time, closing costs are paid on the day of closing. This will also be the day the title is transferred from the seller to the buyer. The money will need to be wired to the receiving parties when the closing happens or it can be paid with a cashier’s check at the closing appointment.
While most closing costs are paid at the time of closing, some are paid before this day. you might pay for land surveys, inspections, an appraisal, certifications, and other services before the date of closing. These fees often need to be paid when the service is rendered.
For buyers, the closing costs will be both one-time fees and recurring costs. The mortgage origination fee, application fee, and some of the other costs may be rolled into the mortgage. Every lender is a bit different and will package their closing costs differently.
Some of the common fees associated with closing costs include:
- Application fee
- Credit reporting fee
- Inspection fee
- Title search and insurance fee
- recording fee
- Transfer taxes
- Real estate agent commission
- Property taxes
- Appraisal fee
- PMI premium
- Attorney fees
- Loan origination fee
There is no way to avoid most closing costs. Even a cash buyer will need to pay some closing costs, but this can help eliminate some of the costs, as well.
Before you buy or sell a property, make sure you know what to expect with closing costs. You want to plan for these fees and make sure you can cover them when the closing day rolls around.