Often discussed but rarely understood, closing costs can make a big difference in your bottom line when you buy or sell a house.
What are closing costs?
Closing costs are the fees, taxes, dues and any other items that have to be settled when the title of the property is conveyed to the buyer. In plain English, it’s all the stuff left over when the sale is closed. This usually covers some routine items — such as recording fees, realtor fees and home warranties — and they can be negotiated at the time of sale.
They can also add up. Closing costs vary by location and the value of the home, but it’s not unheard of to pay well over $10,000 in closing costs on a $250,000 home. When you apply for your mortgage, the lender is required to give you a good faith estimate of your closing costs. That way you’ll know what you’re getting into.
But for fun, let’s take that $250,000 home and take a closer look at some of the fees that might be involved.
The bank has to take its cut, and it usually comes in the form of:
- Points – variable (this is a payment made at the time of closing, outlined in the terms of your mortgage, to reduce the interest rate)
- Taxes and insurance – $215
- Mortgage insurance – $130
- Lender origination fee – $1,000
Prepaid interest and insurance
You’ll need to pre-pay the interest that will accrue between the closing date and the last day of the month. Assuming a closing date on the 15th on our $250,000 house, you could expect it to look like this:
- Interest – $400
- Homeowner’s insurance (1 year) – $650
Third party fees
Here are some typical fees related to third-party dealings with the house. Depending on your state and lender, your fees will vary. Most of these fees are traditionally paid by the buyer, but they can be negotiated if necessary.
- Realtor fee – usually 6% of sale price ($15,000 in this case)
- Attorney’s fee – variable
- Flood check fee – $20
- Credit report fee – $15
- Closing-escrow fee – $175
- Owner’s title insurance – $1,300
- State taxes – $25
- Appraisal fee – $450
- Recording fee – $200
- Tax service fee – $80
- Lender’s title insurance – $125
- Title endorsement – $175
- Homeowner’s association dues – varies
Escrow accounts aren’t always necessary, but when they are, here’s what you might expect to pay on the $250,000 house, assuming a 2 month deposit. These fees are often covered by the seller.
- Homeowner’s insurance – $100
- Property taxes – $350
As we mentioned above, closing costs are negotiable. Depending on the situations of the parties represented in the sale, it might make the best sense to negotiate certain items into the closing sale.
For instance, if the home inspection uncovered an issue with the house and the seller was not motivated to take care of the problem on his own, the buyer can request the seller cover the cost of the repair.
As we saw above, the fees included in closing costs can add up, and no matter whether you’re buying or selling, it can take a substantial chunk out of your bottom line. When appropriate, working to negotiate closing costs can maximize the return on your investment.
Another way to avoid closing costs is to get a no-closing cost mortgage, but those can often cost you in the long run.
Want to work out your own closing costs?
Here are some links to closing cost calculators.