When buying or selling a home, the topic of closing costs is bound to come on the horizon. It takes a village to purchase or sell a home, with several different people playing a role in the real estate transaction. Buyers, sellers, real estate agents, and inspectors are just a few of the different people who dip their toes in the experience. Closing costs are the fees associated with the various services required to close the sale. But what do these closing costs include and how should buyers calculate them?
In this article, CT Homes will explore what closing costs include, how to calculate closing costs, as well as some helpful tips for buyers and sellers looking to close their real estate transactions seamlessly. With our helpful guide, you’ll approach your home buying experience with welcomed transparency.
What are Typical Closing Costs?
Closing costs are the fees associated with finding a home, securing a mortgage, placing an offer, and closing the real estate transaction. Purchasing a home isn’t as simple as choosing the perfect property and grabbing the keys, there are numerous steps along the way that might have fees associated with them. Closing costs will vary widely based on the property type, perceived value, and manner of closing escrow. Let’s explore some of the most typical closing costs:
- Application Fee: Mortgage application fees might be charged by the lender to process the application. Make sure to clarify details with the lender of these fees before applying.
- Credit Report Fee: Some lenders charge a small fee anywhere between $15-30 to pull a credit report from the three credit bureaus. Make sure to ask if your lender includes this charge.
- Underwriting Fees: Underwriting fees are charged by mortgage providers for researching the buyer’s financial, employment, income, and credit score information during the loan approval process.
- Lawyer/Attorney Fees: Some real estate attorneys will charge a few to review and prepare contracts and agreements about the home. While not every state requires the use of a real estate attorney, you should research this before hiring an attorney.
- Property Appraisal Fee: As the buyer, you want to make sure the property is in great condition, causing you to complete a property appraisal with a reliable home inspector.
- Closing Fee: Escrow fees are another anticipated closing cost that will be paid to the party that organized the closing, whether that party is an attorney, escrow company, or title company.
- Escrow Deposit: The mortgage provider might demand an escrow deposit, which is two months of property tax and mortgage insurance payments at the close of escrow.
- Potential Courier Fee: When completing important paperwork surrounding the real estate purchase, it’s smart to ensure the documents arrive at their destination safely. If documents are completed digitally, this fee will not apply.
- Title Insurance: When you purchase a home, you want to make sure it’s legally considered your property. Prevent someone from challenging your ownership by purchasing title insurance for the property.
- HOA Transfer Fees: Those purchasing property within a planned development need to join the community homeowner association. The buyer or seller will need to pay the transfer fee for switching ownership, as well as any insurance and due costs for the upcoming year. HOA fees can dramatically adjust a home’s value as it affects the buyer’s monthly payments, so make sure to factor these in early.
- Prorated Property Tax: When you close the deal, any property taxes that are due from the closing date to the end of the tax year will need to be paid. Make sure to pro-rate these fees accordingly.
Does the Buyer or Seller Pay Closing Costs?
Some closing costs that sellers might be expected include:
- Home Warranty Premiums: Sellers will occasionally offer a home warranty for the first year to peak buyer interest.
- Real Estate Commissions: Perhaps the largest fee a seller will need to cover is the real estate commissions. Broker commissions will vary but are typically 5-6% of the home’s gross purchase price. While these fees might be negotiable, they shouldn’t be neglected when calculating closing costs. Seller is typically expected to pay Agent commissions.
- Title Transfer/Insurance Fees: Sellers may need to pay regionally specific taxes or fees for the transfer of the property’s title or title insurance in the case of issues coming up.
- Escrow Fees: Typically buyers and sellers will split escrow fees 50/50 – “Each to pay their own”.
General Rule of Thumb: as a quick “back of the napkin” estimation, we use 1% of the sales price as an estimate for Seller’s closing costs. I.E. on an $800,000 sales price, sellers can estimate roughly $8,000 (i.e. 1%) is a good starting point to estimate closing costs in CA.
How to Calculate Closing Costs: A Helpful Guide
Understanding how to calculate closing costs is highly dependent on understanding where these closing costs originate. The closing costs we’ve reviewed are only a fraction of the potential fees that can accrue during the transaction. Employing the help of a real estate agent or attorney can vastly improve your ability to anticipate and calculate these costs. These professionals will have a strong working knowledge of the entire process, which can be very helpful down the line.
While each property will vary, the average cost of closing costs is 3-6% of the home’s price. Here are some helpful tips for calculating closing costs so that you’re not blindsided at the end of your real estate transaction.
Gather an Estimate for the Cost
When getting approved for a mortgage, the lender will usually be able to provide an estimate of the anticipated closing costs based on the home’s value, estimated down payment, and mortgage interest rate. Since many closing costs are based on a percentage of the home’s value, an accurate estimate is crucial for securing those funds down the line.
Gather a Full Breakdown of All Costs
Now that you have an idea of the home’s price point, it’s much easier to break down the potential closing costs. These closing costs will include lender services, appraisal fees, and clerical items such as insurance, property taxes, and titles. We also explored numerous other charges that might be included based on the buyer’s experience. Gather a comprehensive breakdown of these services to calculate the anticipated fees.
Research Potential Deductions
While some closing costs are inevitable, such as the mortgage application fees or title insurance, some services can be worked around or potentially deducted. For example, some lenders might include closing costs within the mortgage itself, that way buyers can pay these fees off over time rather than making a lump sum payment.
Refine and Prepare Based on Findings
Once you have a final total for closing costs, make sure that all information you’ve gathered is based on local state requirements and price points. Add up each of the closing costs to determine what will be due at escrow. Another general rule is to always estimate high to avoid unnecessary curveballs. It’s always better to be prepared to pay something and later save cash than not save enough to cover these costs. With that said, here in San Diego we use a 1% of selling price as a quick easy estimate. I.e. If a house sells for $700,000 it is reasonable to budget 1% of that ($7,000) for closing costs alone.
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Whether you’re a first-time homebuyer or you’re simply looking to save money wherever possible, understanding how to calculate closing costs plays a substantial role in any real estate transaction. By anticipating these costs and negotiating when possible, buying a home becomes seamless.
CT Homes can help sellers list their property and have a care-free real estate experience. With cash offers that help sellers move on to the next great investment quickly, CT Homes can expedite the process of selling your home. Contact CT Homes today to learn more.