Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. But as a rule, you can estimate that they typically total 2% to 7% of the home's purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. Yep that's one heck of a wide range. More on that below.
Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion's share of the load (3% to 4% of the home's price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.
How much are closing costs for buyers?
Home buyers pay the majority of closing costs since many of these fees are associated with the mortgage.
"If you're paying cash for a property, there are still a few closing costs, but they are significantly less," says Cara Ameer, a Realtor in Ponte Vedra, FL. Here are some of the fees home buyers should brace themselves to pay:
- A loan origination fee, which lenders charge for processing the paperwork for your loan.
- A fee for running your credit report.
- A fee for the underwriter, who assesses your credit worthiness.
- A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.
- A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.
- A fee for a title search to unearth any liens on the property that could interfere with your ownership of it.
- A survey fee if it's a single-family home or townhome (but not condos)
- Taxes, also called stamp taxes, on the money you've borrowed for your home loan.
How much are closing costs for sellers?
Here are the closing costs that sellers are typically responsible for:
- A closing fee, paid to the title company or attorney's office where everyone meets to close on the home.
- Taxes on the home sale.
- A fee for an attorney, if the home seller has one.
- A fee for transferring the title to the new owner.
While this doesn't seem like much compared with what home buyers have to cough up, keep in mind that sellers typically pay all real estate agents' commissions, which amount to 4% to 7% of the home's sales price. So, no one sneaks through a home closing scot-free.
Why closing costs vary
The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements -- and fees -- for the sale of a home.
"If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up," says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. "New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called 'flip taxes' that condos charge sellers."
To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your Realtor, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their Realtor outlining their own costs.)
Word to the wise: "Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted," says Ameer. Errors can and do creep in, and since you're already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.