What Are Closing Costs, and Who Pays Them?

If you're buying or selling a home, you've likely heard the term "closing costs" thrown around. But what exactly are closing costs, and who is responsible for paying them? Understanding these expenses is crucial to preparing for a real estate transaction. In this blog post, we'll break down what closing costs are, what they typically include, and who is generally responsible for covering them.

What Are Closing Costs?

Closing costs are the fees and expenses associated with finalizing a real estate transaction. They are paid at the closing of a deal, which is the point where the title of the property is transferred from the seller to the buyer. Closing costs can vary widely depending on the location, the property's price, and the specifics of the transaction, but they typically range from 2% to 5% of the home's purchase price.

What Do Closing Costs Include?

Closing costs encompass a variety of fees and expenses, each serving a specific purpose in the transaction process. Here's a breakdown of the most common closing costs:

1. Loan Origination Fee: This is a fee charged by the lender for processing the loan application. It usually ranges from 0.5% to 1% of the loan amount.

2. Appraisal Fee: The cost of having a professional appraiser determine the value of the property, typically ranging from $300 to $500.

3. Home Inspection Fee: A fee paid for a professional inspection of the property's condition, usually costing between $300 and $500.

4. Title Search and Title Insurance: The title search fee covers the cost of researching the property’s history to ensure there are no legal claims against it. Title insurance protects the buyer and lender from any issues that might arise after the purchase. These fees can vary, but title insurance is often around 0.5% to 1% of the purchase price.

5. Survey Fee: If required, this fee covers the cost of verifying the property’s boundaries, generally costing between $300 and $600.

6. Recording Fees: Local government fees for recording the sale of the property and any new mortgage in public records, usually ranging from $25 to $250.

7. Attorney Fees: In some states, an attorney is required to oversee the closing process. Attorney fees can vary widely but typically range from $500 to $1,500. The state of Tennessee does not require an attorney for real estate transactions.

8. Prepaid Costs: These include homeowner's insurance, property taxes, and mortgage interest that needs to be paid upfront. The cost depends on the specifics of the property and the loan.

9. Private Mortgage Insurance (PMI): If the buyer is putting down less than 20% of the home's purchase price, they may be required to pay for PMI, either upfront or as part of their monthly mortgage payments.

10. Escrow Fees: This fee is paid to the escrow company or agent who handles the closing process, typically costing between $500 and $2,000.

11. Transfer Taxes: Some states or municipalities charge a tax for transferring the property's title, which can range from 0.01% to 2% of the sale price.

Who Pays Closing Costs?

The responsibility for paying closing costs can vary, but it is typically shared between the buyer and the seller. Here's a general breakdown of who pays for what:

Buyer’s Closing Costs:

- Loan Origination Fee

- Appraisal Fee

- Home Inspection Fee

- Title Search and Title Insurance (Lender’s Policy)

- Survey Fee

- Recording Fees

- Prepaid Costs (homeowner's insurance, property taxes, mortgage interest)

- Private Mortgage Insurance (PMI)

- Escrow Fees (half)

Seller’s Closing Costs:

- Real Estate Agent Commissions: The seller typically pays the commission for both the buyer's and seller's agents, usually around 5% to 6% of the sale price.

- Title Search and Title Insurance (Owner’s Policy)

- Transfer Taxes

- Attorney Fees (if applicable)

-Escrow Fees (half)

- Outstanding Mortgage Payoff: If the seller has a mortgage on the property, the remaining balance will be paid off at closing.

Can Closing Costs Be Negotiated?

Yes, closing costs can sometimes be negotiated. Here are a few ways this might happen:

Seller Concessions: In some cases, the seller may agree to cover a portion of the buyer's closing costs as part of the negotiation. This is more common in a buyer's market where sellers may be more motivated to close the deal.

Lender Credits: Some lenders offer credits towards closing costs in exchange for a slightly higher interest rate on the loan. This can help buyers reduce their upfront expenses.

Shop Around: Buyers can often reduce their closing costs by shopping around for services like title insurance, home inspections, and attorney fees.

Closing Date: Choosing a closing date towards the end of the month can reduce the amount of prepaid interest the buyer has to pay, slightly lowering closing costs.