What’s Included in Closing Costs, and Who Pays for Them

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October 2, 2020

Buying a house is a series of hurdles, and closing costs are the last one to jump. What are closing costs exactly and how much you can expect to pay for them?

What are closing costs?
What’s included in closing costs?
How much are closing costs?

Can you avoid closing costs?

home buying closing costs explained

What are closing costs when buying a new home?

Closing costs are additional fees incurred during a real estate transaction. Both the buyer and the seller will have to take responsibility for a portion of the closing costs in order to compensate for the service providers facilitating the transaction. Buyers’ closing costs can typically be divided into three categories:

  • Lender Fees: Fund the overseeing of your loan.
  • Third-Party Fees: Includes things like attorney fees and home inspections.
  • Homeowner Fees: Includes property tax, insurance, and homeowner’s association fees. 

Traditionally speaking, the buyer pays the majority of closing costs on a property and the seller absorbs a minimal amount of fees. However, who pays what can vary between transactions and prices can be negotiated between the buyer and seller—but generally speaking—the chief financial burden for sellers is the real estate commission, which typically costs between 5-6% of a property’s sale price. Sellers will also be responsible for paying the transfer taxes, title insurance premiums and sometimes, recording fees.

What’s included in the closing costs

Closing costs vary greatly depending on the property in question, the loan, and the state. Before the purchase is finalized you’ll be given a detailed breakdown of the closing costs. Some common fees you might come across are:

  • Application: For processing your mortgage application.
  • Attorney Fee: To draw up and review the purchase agreement. 
  • Closing/Escrow: Paid to the company overseeing the closing.
  • Courier: Covers the transportation of important documents during the process.  
  • Credit Report: To obtain your credit history for the loan application.
  • Escrow Deposit: Two months of property tax and PMI.
  • Flood Determination: Determines if it’s in a flood zone and requires insurance. Includes ongoing monitoring.
  • Home Inspection: Determines the property’s condition and highlights needed repairs.
  • Homeowners’ Association Transfer: Covers the cost of switching ownership if in a planned development residence.
  • Homeowners Insurance: The full first year’s insurance. 
  • Lender’s Policy Title Insurance: To protect the lender’s investments. 
  • Lead-Based Paint Inspection: For a certified inspector to check the property for lead-based paint. 
  • Points: Optional lump-sum payment reducing your interest rate and monthly payments.
  • Owner’s Policy Title Insurance: Protects you if someone challenges ownership of the property.
  • Origination: The lender’s administration costs.
  • Pest Inspection: An inspection to check for dry rot, termites, etc.
  • Prepaid Interest: Interest accrued between closing and the first mortgage payment.
  • Private Mortgage Insurance (PMI): A monthly fee if the down payment is under 20%, typically. The first month is due at closing. 
  • Property Appraisal: Determines the market value of the property.
  • Property Tax: The first 60 days are usually due at closing. 
  • Recording: For the recording of public land records.
  • Survey: A surveying company will check a property’s boundaries. 
  • Transfer Tax: Paid when the title transfers from seller to buyer.
  • Underwriting: Covers the underwriting of your loan, includes researching and verifying your financial information.

How much are closing costs in NYC and Chicago?

Closing costs vary considerably depending on where the property is located and its value, but you should expect to pay anywhere between 2-5% of the purchase price in closing fees. 

A recent survey conducted by ClosingCorp highlighted that New York City is one of the most expensive cities for closing costs, where buyers are paying an average of $12,847. Chicago, on the other hand, is more in line with the national average, which has average closing costs of $5,609 per property purchased.

According to national law, lenders must provide you with a loan estimate within three days of receiving your application. This document includes a breakdown of what you should expect in closing costs for the property. Although these documents will provide you with a good idea of what you might pay, it’s just an estimate. Expenses are likely to change along the way. Be sure to request a revised estimate during the process, and keep up to date with any changes in fees. 

Around three days before closing, your lender will provide you with a closing disclosure statement that will outline all of the fees and costs associated with your home purchase. Make sure to compare these costs with your loan estimate, and don’t be shy about asking questions as to why the price is different or if the cost is relevant at all.

Can you avoid closing costs?

It’s not fully possible to avoid closing costs entirely, but there are ways to reduce them.

  • Shop around: Before you settle on a lender, make sure to research and compare quotes from different lenders. Once you’ve settled on a lender, you can also choose to use different services for inspections and insurance to cut costs even further.
  • Negotiate costs: Remember that not all closing costs are legal necessities, and many can be negotiated with the lender. Go through your loan estimate with a fine-tooth comb and compare it to your closing disclosure statement. Don’t be afraid to ask questions about costs that don’t seem right, or weren’t there before.
  • Timing matters: Scheduling your closure to take place at the end of a month can help to cut down your costs on prepaid interest charges. 
  • Speak to the seller: In some cases, sellers may agree to absorb some of the closing costs for you. This is especially true if they’re keen on selling as quickly as possible. However, this type of arrangement is usually worked into the purchase offer.

One way to eliminate closing costs is by opting in for a no-closing-cost mortgage, which means you don’t have to pay any of the closing costs at the time of finalizing the sale. However, the lender will usually charge a higher interest rate in return and may wrap the closing fees into the mortgage, and therefore you’ll pay interest on the closing fees instead.

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