When buying or selling a piece of real estate, you’ll quickly learn that there are many costs and fees involved in the process, some of which are unexpected. One such example of a fee that some people don’t anticipate is closing costs.
Although no one looks forward to covering the cost of fees, closing costs are an essential part of nearly every real estate transaction. If you’re interested in buying or selling a home or some other type of property, it’s best to understand closing costs before you begin the process.
This article will serve you well in your real estate ventures and tell you everything you need to know about closing costs. In the following sections, we’ll reveal what closing costs are, what they include, who needs to pay them, where they go, and much more.
What Are Closing Costs?
Before we go any further, let’s ensure that you know what closing costs are in the first place. As you might guess, based on their name, closing costs are fees associated with the closing stage of your real estate deal. These fees can vary greatly depending on the specifics of your deal, your location, and other factors.
What Do Closing Costs Include?
Rather than representing a single cost, closing costs are typically an accumulation of several other fees associated with the real estate deal. Below is a list of what many closing costs often include:
- Agent commission
- Application fees
- Appraisal fees
- Attorney fees
- Broker commissions
- Credit report fees
- Document transfer fees
- Escrow fees
- Inspection fees
- Insurance fees
- Loan origination fees
- Recording fees
- Title fees
- Underwriting fees
- Various taxes
As you can see, closing costs are more of a catch-all term that represents many fees necessary for the purchase or sale of a property. While there are plenty of other fees that closing costs could include, the list above gives you a good idea of what fees are often included. It also reveals how different closing costs can be for each real estate transaction.
How Much Do Closing Costs Amount To?
After learning what closing costs are and what they often include, many people then wonder how much they’ll need to pay to cover their closing costs. Since there are many factors that influence closing costs, there is not one average figure that we can apply to most real estate transactions. Instead, your closing costs will likely relate to the overall size of your mortgage.
In most cases, closing costs will range from about 2 to 6% of the total loan amount for your mortgage. As such, if you’re taking out a larger mortgage, you can expect the closing costs to be higher as well, and vice versa.
To help illustrate this cost, let’s consider an example. Imagine you take out a mortgage that totals $400,000. In that case, your closing costs will likely fall somewhere between $8,000 and $24,000.
Who is Responsible for Paying Closing Costs?
When you’re new to real estate transactions, it can sometimes be difficult to understand whether the buyer or the seller should cover certain fees. This is certainly the case for many first-time home buyers when it comes to closing costs.
In many cases, it’s the buyer’s responsibility to pay most or all of the closing costs. However, there are some instances in which the buyer and seller may share the burden of the closing fees. However, even when this cost is shared, the buyer usually covers a larger percentage of the cost.
How Do You Pay for Closing Costs?
Now that you know the basics of what closing costs are, what they include, and who should pay them, let’s discuss how to make closing cost payments. Fortunately, there are a few options you can explore to cover these necessary costs.
Paying Closing Costs Out of Pocket
The simplest way to pay your closing costs is to cover them out of pocket. If you have a checking or savings account that has plenty of funds in it, you can use one of these accounts to pay the fees directly.
However, this is only an option for those who tend to have a decent amount of cash available to them. Since there are many costs you’ll need to cover when buying a home, there’s a reasonable chance that paying out of pocket for closing costs is not an option for you. If that’s the case, consider one of the following options.
Rolling Closing Costs into Your Mortgage
Some mortgage deals will allow you to roll your closing costs into your total mortgage amount. This option is excellent for those who don’t have a lot of cash on hand. However, you should understand that adding these costs will impact the amount of interest you owe on your mortgage.
Requesting Seller Credit
Some loan types give you the option of requesting the seller to cover a larger portion of your closing costs. This approach is not always an option, but it becomes more relevant in situations in which the seller is having difficulty receiving offers on their listed home.
Do Some Home Purchases Not Require Closing Costs?
If you’ve been familiar with real estate for long enough, you have likely heard of so-called no-closing-cost mortgages. However, this notion is somewhat misleading.
No-closing-cost mortgages do not mean you get to avoid the closing costs entirely. Instead, they simply roll your closing costs into your mortgage, similar to how we explained in the section above. As such, while you won’t need to pay closing costs right away, you will need to pay for them eventually with the interest they accrue over time.
Get the Help You Need to Buy the Home of Your Dreams
Closing costs are just one of many factors you should learn about before you buy a home. Unfortunately, many aspects of the homebuying journey can be complicated and confusing to many people. However, you should not allow confusion to prevent you from achieving your dreams of homeownership.
Instead, you should get in touch with a knowledgeable team that can guide you through the entire process. At Mortgage Financial Services, we’re ready to help you land the home of your dreams. Contact us today to learn more about how we can help.