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Understanding Typical Real Estate Closing Costs for Buyers and Sellers
When you’re buying or selling a home, you’ve probably heard about “closing costs” — those final expenses that come up at the end of a real estate transaction. These fees can be a bit of a mystery, and it’s important to understand what they are and how they’ll impact your budget. Whether you're a buyer or a seller, here’s a breakdown of what to expect.
What Are Closing Costs?
Closing costs are the fees and expenses paid by both buyers and sellers to complete the transaction of a real estate sale. These costs can vary based on location, property price, loan type, whatever lender you are using, and the specific details of the deal.
Closing Costs for Buyers
For homebuyers, closing costs usually range from 2% to 5% of the loan amount. These fees can add up quickly and DO NOT include your down payment, so it’s important to budget for them early in the process. Here's a breakdown of common closing costs for buyers:
Loan Origination Fees If you're financing the purchase with a mortgage, the lender typically charges a loan origination fee. This fee covers the cost of processing the loan application. It usually ranges from 0.5% to 1% of the loan amount.
Appraisal Fee
Lenders often require an appraisal to determine the value of the property you're buying. This fee typically costs between $300 and $700, but it can be higher in some areas or for larger homes. This fee is usually paid directly to the lender during the due diligence process. Some lenders may offer a credit for this fee or reimbursement at closing, so be sure to ask your loan officer if they have any of these incentives available to you.
Discount Points
If your interest rate is on the higher side and your lender has worked out a monthly payment more appropriate for your budget, you may be required to pay discount points at closing. Discount points are essentially pre-paid interest that is paid up front and can significantly reduce your monthly payments, as well as the total interest paid over the life of the loan.
Home Inspection Fees
Here at Lime Rock Realty, we recommend our buyers to hire a home inspector to evaluate the condition of the property. Home inspections usually cost between $300 and $800 depending on the services selected, but this price can vary based on the size of the home and location. In addition to a general home inspection, a buyer may choose to conduct a pest/termite inspection, septic inspection, and water quality testing for wells. Sometimes, if a general home inspection reveals potential issues, a buyer may be encouraged to hire a professional electrician, engineer, roofer, or licensed contractor to further evaluate possible problems identified on an inspection report.
Title Search and Title Insurance
A title search ensures there are no legal issues with the property’s ownership and is required if you are using a loan to purchase. Title insurance protects both the buyer and lender if issues arise in the chain of title, legal description, etc. The cost of title insurance varies.
Attorney Fees
In North Carolina, hiring an attorney for the closing process is required. In some states, real estate closings are conducted using both attorneys and title companies. Attorney fees vary from firm to firm and may change if your transaction requires additional, non-standard legal guidance or documentation.
Prorated Property Taxes
A buyer is responsible for paying property taxes, prorated for the duration of their ownership in a given year. If property taxes have already been paid for the year, the seller will receive a credit at closing for the buyer's portion of the property taxes. If the property taxes have not been paid, the buyer will receive a credit at closing for the seller's portion.
Prepaid Property Taxes and Insurance
Lenders may require buyers to prepay certain costs such as property taxes, homeowner’s insurance premiums, and HOA fees (if there are any) at closing. These costs are typically prorated based on the time of year and can vary by location. Some lenders only collect 1-3 months, while some loan types may collect up to a year's worth of prepaids to establish an escrow account.
Recording Fees
These fees are charged by local governments for recording the property transfer. There are separate recording fees for your deed and a deed of trust if you are using a loan.
Survey
Unless required by the lender or attorney, a survey is an optional inspection that can be conducted during your due diligence period or even after closing. A survey is the only reliable method of calculating total acreage, as well as locating and identifying property corners and boundary lines. A survey can also show if there are any encroachments, easements, or right-of-ways on the property.
Buyer's Agent Commission
If the seller is not explicitly offering to pay a commission to a buyer's agent and this cannot be negotiated during the offer period, the buyer will be expected to pay their agent based on whatever they agreed to in their Buyer's Agency Agreement, at closing. If the seller is only paying a small percentage to a buyer's agent, the buyer may be asked to make up any difference in compensation per whatever compensation is outlined in the Buyer's Agency Agreement. For a more detailed explanation of commissions, check out this blog post.
Wire and Misc. Admin Fees
Don't be surprised if you see a variety of miscellaneous administrative fees on the buyer's side of a closing disclosure, primarily if you are using a loan to purchase. Lenders often charge minor amounts for things like flood zone analyses, credit inquiries, rate lock fees, and even mailing fees. Be sure to ask your lender UP FRONT about any known fees they will charge at closing.
Closing Costs for Sellers
Sellers also have closing costs, though they tend to be different from those of buyers. While buyers generally pay fees to facilitate the loan and transaction, sellers’ costs often relate to transferring ownership and paying off their mortgage. Here are the common costs that sellers face:
Outstanding Mortgage Balance
Sellers must pay off any remaining balance on their mortgage. The lender will provide a payoff amount, and that amount must be settled before the property can change hands. Sometimes, additional processing fees may be applied by your lender to facilitate a payoff.
Repairs and Maintenance
If there are issues found during the buyer's home inspection, the seller may need to cover lender required repair costs. Some sellers may agree to a credit toward repairs instead of paying upfront, depending on negotiations. The North Carolina Standard Offer To Purchase states that a buyer is purchasing 'AS IS' so unless a lender sets required conditions to close, a seller is never obligated to make or conceed money towards repairs once the home goes under contract.
Prorated Property Taxes
A seller is responsible for paying property taxes, prorated for the duration of their ownership in a given year. If property taxes have already been paid for the year, the seller will receive a credit at closing for the buyer's portion of the property taxes. If property taxes have not been paid, the buyer will receive a credit at closing for the seller's portion.
Transfer Taxes
In North Carolina, sellers must pay a transfer tax called excise tax when the property changes ownership. The excise tax across the state is calculated at $1 for every $500 in sales price. Additionally, some counties charge an additional tax or transfer fee which is usually a set percentage of the sales price.
HOA/Admin Fees
If the home you are selling is in a neighborhood with an HOA, some association management companies charge an administrative fee to help facilitate the ownership transfer. Be sure to ask your HOA if they charge a fee for a real estate sale and whether the buyer or seller is responsible for paying it.
Attorney Fees
Similar to buyers, sellers must pay legal fees for an attorney to draft necessary closing documents, including the deed.
Wire Fees
Banks and attorneys may charge nominal wire fees to conduct mortgage payoffs and transfer proceeds after closing. For some disbursements, you can avoid wire fees by opting for a check.
Home Warranty
Sometimes, sellers may offer a home warranty to buyers as an incentive or this may be negotiated in lieu of repairs during due diligence.
Listing Agent Commission
A seller will pay agent commissions based on the agreed upon terms in the listing agreement. This amount is completely negotiable, however certain real estate firms have firmly set commission requirements and are not able to negotiate those terms without authorization from their Broker in Charge. A seller is not, and has never been required to pay a buyer's agent. Here at Lime Rock Realty, our suggested fee to sellers is 6%, which is split evenly between Lime Rock Realty and whatever firm brings a buyer. For a more thorough discussion on commissions, check out this blog post.
How to Prepare for Closing Costs
Both buyers and sellers should be prepared for closing costs early in the process. For buyers, it’s wise to save for these costs in addition to the down payment. Some buyers may even ask the seller to contribute to closing costs, though this isn’t always possible or realistic for the market. For sellers, understanding the total commission and other costs upfront can help you price your home accurately and avoid unwanted surprises at closing.
Conclusion
Closing costs are an unavoidable part of buying and selling real estate. Understanding what to expect can help you plan and budget accordingly. By familiarizing yourself with typical closing costs, you’ll be better prepared for the financial responsibilities of a real estate transaction. Whether you’re a buyer or a seller, staying informed will help ensure a smoother, more successful closing experience.
