A Guide to Closing Costs for Buyers and Sellers
Closing costs for buyers and sellers are often misunderstood, at least in the beginning of real estate transactions. Here’s what you need to know.
Buyers have more costs
In a closing, both buyers and sellers have costs. Typically, the buyer faces more line-item expenses than the seller (although sellers pay more).
For starters, most buyers are getting loans to make the purchase, and many charges stem from the loan.
A buyer should receive a loan estimate form early in the sale process. This document itemizes the approximate costs the buyer will face in the purchase, so there aren’t any surprises at closing. Some buyers use the information on the loan estimate form to shop for different lenders, interest rates and costs.
Usually, buyers getting a loan will see some of the following costs:
- Appraisal fee
- Origination fee
- Prepaid interest
- Prepaid insurance
- Flood certification fee
- Tax servicing fee
- Credit report fee
- Bank processing fee
- Recording fee
- Notary fee
- Title insurance
Aside from the costs of getting a loan or buying a home, some expenses such as property taxes or homeowners association dues are pro-rated and paid at closing. For example, if you’re buying a home and you close toward the end of the property tax period, you’ll likely need to pay the balance of taxes upfront.Be sure to go through these fees line by line with your mortgage professional.
The same holds true for prepaid loan interest. If you close toward the end of the month, the lender may ask for the first month’s payment up front.
Some costs are negotiable
Coming up with an extra 1 to 2 percent toward closing costs can be a bigger deal than a $5,000 reduction in the purchase price. So ask the seller to pick up some of the closing costs as a part of the negotiation.
Credit for $5,000 toward closing costs will be a much greater bang for the buyer’s buck. The price reduction won’t amount to much more than a few dollars per month over the length of the home loan. But saving $5,000 at the closing will be money right back in the buyer’s pocket.
The agent’s commission is usually the seller’s biggest cost
For sellers, there are always fewer line items on an estimated closing statement. But sellers generally bear the biggest brunt of the fees: the real estate commission.
The commission is based on a percentage of the total sale price, so it tends to be the biggest fee. In addition to the real estate commission, sellers may have to pay the balance of their property taxes, if they haven’t done so already, as well as any prorated homeowners association dues.