Closing Costs - What You Should Know

​Closing costs

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Cash out of pocket associated with the closing of a real estate transaction. ​​

The most common question we receive during a closing process from a buyer or a seller, is: How much are closing costs?

There is never a perfect answer to that question. These costs vary greatly depending on the type of mortgage, the attorney's fees, the price and size of the home, and with the lender (and your state/town/county). They can range from 2% to 5% of the purchase price of the property for buyers, and upwards of 5-7% for sellers.

Let's start with seller's closing costs, since they are easier:

for the seller

• Realtor's Commission: Realtor's fees vary greatly, from 1% to 6% of the purchase price, but these are paid at closing off the proceeds of the sale;
• Conveyance Tax: In CT, when property is transferred, the seller pays 1.25% of the purchase price as a tax at closing (this may vary by state);
• Reimbursements: The buyer will pay the seller back for taxes that have already been paid, as well as water bills, oil in the tank, or other costs that were paid in advance (this is a net positive for the seller);
• Legal and closing fees: Legal and closing fees range from several hundred to well over a thousand dollars, based on the purchase price of your home. These fees cover the cost of the attorney and handling all the purchase-related documents and funds. For argument's sake, we budget for $1000;
• Misc. Fees: There are a handful of small fees that are paid by seller at time of closing, such as recording fees, wiring fees, or anything else that is incurred by the attorney to close the deal. These costs shouldn't exceed $500.

Keep in mind that this list is not exhaustive, but gives a good benchmark.

for the buyer

A bit more difficult to estimate are the closing costs for the buyer, which are detailed here:

• Legal and closing fees: Legal and closing fees range from several hundred to well over a thousand dollars, based on the purchase price of your home. These fees cover the cost of the attorney, handling all the purchase-related documents and funds, municipal search and a title search. The title search is usually conducted by an attorney;
• Appraisal fee: Appraisals have become a requirement for underwriters to determine the value of a property prior to approving a mortgage. The price of an appraisal can range from $300-$700+ depending on the size of the property;
• Title insurance: Protects the title company and the buyers from the rare possibility that the seller does not own the property or from title defects. Depending on the purchase price of the property, the cost can range from $500 to several thousand dollars;
• Homeowners Insurance: Depending on the value of the property and the amount of coverage, homeowners insurance can cost between $200-$2000+. A mortgage will not be approved unless an adequate homeowners insurance policy is purchased. It may be required that up to a year’s premium is paid at closing;
• ​​Loan origination fees: Loan origination fees are paid to the company originating your loan to cover their costs associated with creating, processing, and closing your mortgage. This fee is typically about one percent of the loan value depending on the lender, but can range from 0% - 3% of the mortgage amount. Loans can be obtained with no origination fee for a slightly higher interest rate;
• Property taxes: Depending on the taxes of the property and the date of the closing, property taxes can range from several hundred dollars to several thousand dollars. At closing, the buyer owes the seller the prorated amount of prepaid taxes;
• Loan Discount (or points): Rare when interest rates are low, this charge is used to adjust the yield on the loan to what market conditions demand;
• Other lender fees: These fees can include underwriting fees, running credit reports, flood certification, tax service fee, amortization fee and other miscellaneous fees. The cost of these fees can range greatly from $500-$1000;
• Prepaid Interest: The amount due is based on the loan value and depends on the time of the month that closing occurs. If closing occurs at the beginning of the month then the maximum interest will be due. The closer to the end of the month, the less interest will be due;
• PMI (Private Mortgage Insurance) premium: PMI protects a lender should the buyer default on the mortgage. The cost of this insurance will depend on the down payment under 20% of the purchase price. At closing, a buyer will be required to pay a couple months – to a year’s premium up front. PMI can be avoided by putting at least a 20% down payment;
• Inspections: An optional, yet important aspect of purchasing a property, the cost of an inspection ranges between $300-$1000+. Variables such as the age and size of the house will effect the determined range, as well as other types of inspections such as septic, lead paint, or radon tests. The above figures are strictly the cost of a typical building inspection. Inspections are usually paid the day of the inspection or soon after, but at times will be paid at closing;
• Other Adjustments: If you are buying an investment property, or one that is collecting rent, there is an adjustment for rent and security deposit at closing;
• Misc. Fees: There are other fees such as recording, wiring, and city fees that can be incurred at closing that probably add up to $500 or so.

As you can see, the assumptions made here can throw these numbers into HUGE ranges that will catch you by surprise. We recommend that you communicate with your attorney, lender, and Realtor about these closing costs prior to making offers, so you are well informed. The Lender should give you a statement of fees and closing costs before you commit to any interest rate lock. 

I will also mention that there are a handful of other factors that effect these closing costs such as the state in which you live, the city, and the time of the year (as specified in the above).

However you ended up on this post, feel free to comment or send up a private message if you have any questions at all about closing costs or the buying/selling process.