To answer the question of who pays closing costs shortly, ideally, sellers pay closing costs. Now, let’s dig a little deeper. This article aims to answer all your queries pertaining to closing costs. So that you know who pays closing costs and why when buying or selling a property. 

Closing costs are something many buyers don’t want to talk about. The simple reason is that they do not want to spend more money after making the biggest purchase of their life, a home. However, there is no avoiding the closing costs as you have to face them at some point in time. So, it is better to know all there is about them. Isn’t it?

What are closing costs?

In simple terms, closing costs are all the fees and expenses that home buyers and sellers pay on the closing day. 

While home buyers and sellers mostly split closing costs, some localities have their own practices on who pays closing costs and how to split them. You must discuss what closing costs are like in your locality with your real estate agent at the start of your home buying process. This can also help you negotiate seller concessions.

How much are closing costs?

Total closing costs on residential properties can amount from 8% to 12% of a home’s total purchase price. However, there is no set percentage or number when it comes to closing costs. The final cost can vary as per insurance costs, local property taxes, and other factors.

Generally, the sellers pay about 6% to 10% of the home’s purchase price in closing costs and the buyers pay about 2% to 5% of the home’s sale price. While sellers’ closing costs are deducted directly from home sale proceeds, buyers pay their closing costs out of pocket.

So, for example, if you buy a home for USD 250,000, your closing costs can range from USD 5,000 to USD 12,500. When selling that same home, your closing costs can be anywhere from USD 15,000 to USD 25,000.

You can’t know the final closing cost number until around three business days before the closing day. A closing or settlement statement describes all the closing costs. Sellers may get a heads-up on the cost earlier if their agent has created a net sheet for them. It is an itemized breakdown of all of the closing costs deducted and an estimate of the final amount they will receive after the signing of the final purchase contract.

Now, let us know in detail who pays closing costs.

Who pays closing costs?

As we have mentioned earlier as well, both buyers and sellers are required to pay for certain costs at the closing table. While both home buyers and sellers pay the closing costs, it is common for the parties to negotiate who will cover which cost. Again, the closing costs can vary as per the loan you choose. So, home buyers can be aware of that when shopping around for a mortgage.

Closing costs consisting of the ‘line-item’ expenses are solely reserved for the buyer. While sellers have to take care of some expenses at the closing table, they may not be considered closing costs. Sellers are expected to pay the realtor fee at the time of closing. And the buyer is responsible to pay for just about everything else including the house inspection cost. In total, closing costs are usually the home buyer’s responsibility unless the negotiation terms of the deal state otherwise.

Closing costs for sellers

Home buyers and sellers pay different types of closing costs. 

If you are selling your home, you may have to pay the following costs:

1. Title fees: The costs associated with transferring your home’s title from your name to the buyer’s name.
2. Realtor commissions: The compensation to the buyer and the seller agent for the home sale is typically paid by the home seller. It is about 6% of the final sale price.
3. Property taxes: In case there are any unpaid property taxes on your home, you will be required to bring them current, as of the amount owed during closing.
4. Homeowners association fees: If your home is in a community with a homeowner’s association, you must pay any outstanding HOA fees at the time of closing.

Generally, these expenses can be deducted from your home’s purchase price, unless you want to pay for them separately.

Closing costs for buyers

While the home sellers pay to prepare and transfer their home if you are a buyer, you are responsible for costs relating to ensuring the home is the one you want to buy. Moreover, you need to pay fees related to getting financing. 

If you are buying a home, you may have to pay the following costs:

1. Homeowners insurance: This cost can be paid into your escrow account and it can cover your insurance payments for the year.
2. Home appraisal costs: A home appraisal is a professional estimate of a home’s value and you pay to get that done and uncover the exact value of the home.
3. Loan origination fee: This fee is charged by the lender to set up your mortgage. The cost of this fee is usually a percentage of the loan.
4. Prepaid interest: Prepaid interest is the amount of interest you owe from the time you sign to avail of the loan to the time you make your first payment. The earlier you close in a month, the higher this cost gets.
5. Mortgage insurance: Private mortgage insurance protects the bank from financing your mortgage in case you don’t pay. However, if you pay more than 20% as a down payment, you won’t need this insurance.
6. Recording fee: You pay this fee to the city or county to record the purchase of your home and mortgage.
7. House inspection costs: Not all mortgage lenders need a home inspection to get done, but it is highly recommended for home buyers. It can save you from surprise repair and upkeep costs at a later stage.
8. Credit report costs: Your lender pulls your credit report and the fee for that is charged to you. But, it is fairly minimal.

While the list of buyer’s costs may seem longer, many of the costs are minimal.

How to save money on closing costs?

Not all the closing costs have to be paid. You can negotiate or transfer certain costs to reduce your out-of-pocket costs and monthly mortgage payments. 

Below are the things you must consider as a buyer to save money on closing costs:

• Ask the home seller to pay closing costs. This is the easiest way out for you to save money on closing costs. If you are buying a home in a buyer’s market, it is possible that the seller will agree to cover your closing costs.
• Shop around for good lenders. Different lenders offer loans at different rates and charge different fees. If you are not satisfied with the offers you are getting, shop around and look for better offers.
• Close the sale near the end of the month. You can choose when you want to close your home. Closing costs are considered on the basis of when you move into a home and prorate your payment based on when you signed. The later you close in the month, the lower will be these prorated costs.
• Lock in your mortgage rate. Mortgage rates depend on the market and are variable. If you think the rates can go up, you can pay and lock in your rate for some time. If you think that the rates will go down, you can skip this cost.

To sum it up

Buying a home is proportional to new beginnings in life. It should be an exciting time for you. While you may find it overwhelming by the line items on your loan, a good home lender can guide you through every step of the way and unburden you from much of the stress related to closing costs.