You’ve probably heard about “closing costs,” and you’ve probably got a lot of questions about them, too:
What are closing costs?
When do I pay them?
How you calculate closing costs?
Can they be included in loans?
We know it can get confusing, and the stakes are high: Buying or selling a house is one of the most significant financial transactions you’ll ever make, and there are a lot of moving parts. The home-buying process is a lot more complicated than what you’ve seen on TV, so let’s start with the basics:
What are closing costs?
The term “closing costs” is used as a catch-all for the charges and fees that come along with your home purchase or sale — separate from and in addition to the home sale price.
Typically, both the buyer and seller have closing costs to take care of. Especially for buyers, it’s important to budget for these costs in addition to what you expect to pay for the home itself.
What is included in closing costs?
For buyers: Costs typically include:
- Mortgage insurance
- Homeowner’s insurance
- Property taxes
- Appraisal fees
They can also include fees such as loan origination fees, title searches, and survey and credit report charges.
When your agent or lender mentions “closing costs,” ask them to list all the fees they’re referring to. That way, you make sure you’re on the same page and won’t encounter unwelcome surprises or make home-buying missteps.
For sellers: Costs typically include:
- Ownership transfer fees
- Home warranty
- Real estate commission for both the buyer’s agent and the sellers’ agent
Sometimes, closing costs come into play in the negotiation of the sale price, too. The seller may decide to cover some of the buyer’s costs to sweeten or finalize the deal.
How much will you need to pay?
First and foremost, it depends on your home’s sales price, but also on your location and the local rules and fees.
As a rule of thumb, buyers’ closing costs typically run about 2 to 5% of the home’s purchase price. So, if you’re paying $250,000 for a house, you should plan to pay between $5,000 and $12,500 more at closing.
The seller is responsible for paying both their real estate agent’s commission and the buyer’s agents’ commission. Typically, when you sell your house, you will pay around 6% in commission, split between the buyer and seller’s agents.
Where can I find a closing costs calculator?
Closing costs depend on both the sale prices and local rules and regulations. Checking out a closing costs calculator can help you wrap your head around exactly how much cash you should have on hand.
Some things you’ll typically need to fill out a closing costs calculator are:
- Type of mortgage/loan (fixed or adjustable rate)
- Loan term (how many years)
- Down payment
- Sales price
- Zip code
More specific calculators will also ask for:
- Credit score
- Property taxes
- Interest rate
- Mortgage points (fees that you can pay directly to the lender to get a reduced interest rate)
Here’s an example of what a closing costs sheet might look like:
Remember, a closing cost calculator can only offer you an estimate. Again, for a better idea of what to expect in your transaction, always check in with your real estate agent. They’re the ones who will know the ins and outs of what you’re in for!
When are they due?
If you’re buying, most closing costs are due when you sign your final loan documents. The buyer and seller will work together to plan a closing date, which is partially dictated by how quickly documents can be created and the loan finalized.
Personal checks typically aren’t accepted. Ask your agent what you need in advance, so you can get a cashier’s check or wire the money to escrow. If you’re confused, don’t be afraid to ask your lender or broker! They will have all the details, and they’re used to walking people through this process.
As a seller, your closing fees will typically be deducted from the proceeds of your sale. If your equity is low, you may need to pay some of these fees out of pocket.
Can closing costs be included in loans?
Depending on what type of loan you’re taking out as a buyer, you may be able to get your loan to cover your closing costs.
Consider asking your lender about a no closing cost mortgage. In this situation, you avoid paying the closing fees upfront, but your mortgage interest rate will be a bit higher. If cash is tight and you’ve thrown everything you have at the down payment, this might be worth it. But make sure you map it out — you may decide just paying out of pocket is a better choice in the long run.