Closing Costs: How Much Are Common Mortgage Closing Expenses?

Mortgage Closing Costs: How Much Will You Pay for Closing Charges?

So, you've found your dream home and are ready to make it yours. But wait, something is lurking in the shadows - closing costs! Closing expenses are like the secret agents of the real estate world. They're the mortgage fees and expenses that sneak up on you when you are in the home-buying process, just as you're about to finalize the deal. 

Are you dreaming of buying a home? Don't forget about the down payment! But wait, there's more to mortgage expenses than meets the eye. The taxes and fees paid to close a real estate deal are known as closing expenses, which may sometimes be somewhat hefty. But fear not! We're here to shed some light on this mysterious topic.

In today's article, we will uncover the closing Costs, types of closing costs, and who pays closing costs.

Key Highlights

  • Closing costs are the extra fees when buying a home.

  • Closing costs can affect both buyers and sellers.

  • Closing costs include mortgage origination and underwriting fees, real estate commissions, taxes, insurance, and record filing.

  • Before sealing the deal, the law requires buyers and sellers to discuss and settle the closing costs openly.

What are Mortgage Closing Costs?

Closing costs are the extra charges that buyers and sellers pay to finish a real estate transaction on top of the property's price. Lenders are mandated by law to give purchasers a closing disclosure three working days before the planned closing (also known as settlement) date.

Costs like this usually cover things like:

  • Appraisals fees

  • Discount points

  • Surveys

  • Taxes

  • Credit report fees

  • Inspections

  • Title insurance

  • Legal fees

  • Escrow charges

  • Loan origination fees

The parties to a real estate transaction may be required by law or the terms of the sales contract to pay specific fees in addition to the purchase price. These fees are known as closing costs. Closing costs are essential to house owners since they represent a substantial sum when buying or selling a home.

What is the formula for calculating closing costs?

Closing expenses are additional expenses beyond the purchase price that can be paid by either the buyer or the seller or shared between the two per the conditions of their sales contract. 

Home buyers and sellers should realize that the closing cost is essential and can determine the total cash needed when a house is being purchased or sold.

These expenses include appraisal, title insurance, attorney, and other loan origination fees. Calculation of closing cost depends mainly, but not necessarily only, on the agreed formula with the buyer and is always different. Nevertheless, it is usually estimated that these costs may vary from 2% to 5% of the cost of buying this house.

For Example:

Closing costs for the home, at 3% of the purchase price of $300,000, would come to $9,000. Remember that this estimate is just a glimpse into the potential closing expenses. The final costs may vary based on the unique details of your home purchase.

Who Pays Most of the Closing Costs?

Who pays the closing costs may be specified in the buyer-seller agreement. Generally, both parties pay the closing costs. Still, in the end, everything depends on what is written in the home purchase contract. 

For example, most Florida sellers pay for an owner's title insurance coverage. Surprisingly, in the state, four out of the 67 counties, including Miami-Dade and Broward, with their high population density, experienced the opposite.

Buyers usually cover most closing costs, but sometimes sellers have to pitch in, too. When considering purchasing a property, it's crucial to account for closing fees, the purchase price, and other charges.

Many things are negotiable, and who pays what closing fees might also change based on the state of the market. In a seller's market, for instance, a buyer should negotiate concessions more cautiously since there is a lower chance of approval if the seller has several rival bids. Things may be bargained more in favor of purchasers in marketplaces with more negotiating power.

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How Much Are Closing Costs?

Closing costs are not standardized in terms of amount. Sellers usually pay more than buyers when considering real estate agent fees. Sellers typically spend around 6 to 10 percent of the purchase price. In comparison, buyers usually cover closing expenses ranging from 2 to 5 percent of the property's sale price. Sellers subtract closing costs from their house sale profits, while buyers usually pay their share upfront.

Watch how that performs in the present market. For October of 2023, assume that a house sells for the $391,800 national median price. The buyer pays closing costs ranging from $7,836 to $19,590, depending on the transaction amount. Transaction fees range from $23,508 (6% of the total) to $39,180 (10%).

Unfortunately, a closing statement or settlement statement will usually reveal the final closing cost three working days before closing. All closing fees are listed in this document in black and white. 

Suppose the seller's agent has created a seller's net sheet, which includes an itemized breakdown of all closing costs and an estimate of the amount the seller will get or net when the final purchase contract is signed. In that case, the seller may receive notice earlier.

What Types of Closing Costs Do Buyers Pay?

Many of the closing expenses purchasers pay are associated with getting a mortgage. They are related to getting a house loan. Closing fees for purchasers often consist of the following:

  • Fees associated with the lender: You pay the lender for the costs incurred in arranging and drafting your loan and handling your application, including credit checks and other underwriting procedures.

  • Appraisal: As part of the mortgage application procedure, your lender will also need a house appraisal or an unbiased professional's evaluation of the property's value.

  • Homeowners insurance: You'll probably need coverage, and the first premium payment—or occasionally more—is usually due at closing.

  • Costs associated with title: Title insurance guards against future challenges relating to the house's title. It is often required for purchasers to obtain owner's title insurance and lender's title insurance, which protects the mortgage issuer.

  • Home inspection: You will cover the inspector's costs at the closing table if you decide to have a home inspection to determine the state of the property (which you should do).

  • Attorney fees: A deal can only legally close in some areas with a document. Thus, real estate attorneys frequently analyze contracts and title papers and assemble closing documents. Though there could be fixed costs for specific jobs, such as writing the buy and sale agreement, they usually bill by the hour.

  • Prepaid interest: The sum of money that will build up on your loan between the closing date and the first mortgage payment is known as prepaid interest.

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What Types of Closing Costs Do Sellers Pay?

Closing expenses for buyers and sellers are different. Unless specified otherwise, these costs are typically deducted from the house's purchase price. If you sell your home, be prepared to cover these expenses:

  • Realtor commissions: Usually, sellers cover the commissions for both agents (their own and the buyer's) engaged in the transaction. This will be your most significant expense, often about 5–6% of the total purchase price. Six percent, or $23,508, is applied to a $391,800 median price for a home transaction.

  • Title fees: The expenses related to the seller giving the new buyer title to the house.

  • Transfer taxes: These are paid when ownership is changed from you, the present owner, to the buyer, the new owner.

  • Property taxes: As of closing day, the seller will be responsible for bringing any delinquent property taxes on the house current.

  • HOA dues: In a similar vein, if the house is located in a neighborhood managed by a homeowners association, the dues must be paid in full by the closing date.

Closing Costs vs Cash to Close

Understanding closing costs and funds to close is crucial in mortgage deals. Though connected, they have different meanings and functions. Explore the differences between these terms.

Closing Costs: Fees and Expenses

The closing cost is the amount of money incurred to process all other expenses for finalizing real estate transactions. Such expenditures may include valuation fees, title insurance, lawyer services costs, and loan charges. Essentially, closing costs encompass the financial obligations that the buyer and seller must settle during the closing process.

Cash to Close: Total Funds Needed

On the other hand, cash to close refers to the total amount of funds required to complete the mortgage transaction. Apart from closing costs, it comprises other payments such as down payment and prepaid expenses. Simply put cash to close equals the money a buyer should set aside to buy the house.

Differentiating the Two

To summarize, closing costs are specifically the fees and expenses incurred during the closing process. At the same time, cash to close encompasses all the funds needed for the mortgage transaction, including closing costs, down payment, and prepaid expenses. 

Closing costs are a subset of cash to close.

Closing costs and cash needed to close can vary based on factors like location, loan terms, and house price. Consider consulting with a mortgage lender or real estate expert for a precise estimate of settlement costs tailored to your unique circumstances.

Top Three Ways to Lower Mortgage Closing Costs

There are things you can do to lessen the strain if you're worried about closing fees mounting up. Apart from comparing quotes for insurance and haggling over legal bills, remember these tactics:

Compare Loan Providers

You may evaluate the costs of several lenders by obtaining loan estimates and mortgage approvals from many lenders. With the assistance of this information, you may query possible lenders and attempt to work out a deal on items like loan origination and closing or escrow agency costs.

Request a Contribution from the Vendor

You can negotiate with the sellers to have part of your closing costs covered, depending on your desired location for your residence and other specifics of the deal.

Look into Incentives or Refunds

For qualified borrowers or first-time homeowners, several banks could give incentives. Ask about these alternatives while searching for a mortgage provider is recommended.

Final words

So there you have it - Understanding closing Costs and who pays closing costs! Closing costs are a collection of fees that come up when you're closing a real estate deal. 

Buyers shoulder most costs, such as mortgage origination and underwriting, taxes, insurance, and record filing. By law, buyers and sellers must be informed of closing costs and reach an agreement before finalizing a real estate contract.

Since closing expenses might be unexpectedly high, including them in your budget is critical. The most sensible action plan is to save enough money to pay these costs, even though you might be able to minimize them or have them rolled into your mortgage loan.

FAQs

What are closing costs?

The fees and charges involved in completing a real estate transaction are known as closing costs. These expenses may include appraisal fees, legal fees, title insurance, origination fees for loans, and other costs.

Who pays for closing costs?

Closing cost reimbursement obligations may differ based on the terms of the buyer-seller contract. Both parties usually cover closing fees, but in the end, it all comes down to what is specified in the house purchase agreement.

How much are closing costs?

Several elements, such as the property's location, the transaction cost, and the particular charges involved, would come together to form the closing expenses. In contrast, closing costs can be between 2% and 5% of the home's list price.

When do I have to pay closing costs?

Usually, closing fees are settled after the property transaction is completed or at closing time. It could be necessary for you to send in a wire transfer or cashier's cheque to meet the closing costs.

How do we reduce closing costs?

Specific tactics, including haggling with the seller to shoulder a portion of the fees or doing some price comparison shopping for less expensive services like home inspections or title insurance, can assist in saving closing costs. Reviewing these choices with your lawyer or real estate agent is crucial to determining what is feasible for your particular circumstances.

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12 Dec, 2023

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