When buying or selling a home, the purchase price is just one part of the financial equation. Closing costs—the additional expenses required to complete a real estate transaction—can significantly impact your bottom line. These costs typically range from 2% to 6% of the loan amount for buyers and can reach 8% to 10% of the sale price for sellers. Understanding these expenses is crucial for proper financial planning and avoiding surprises at the closing table.
What Are Closing Costs?
Closing costs are the expenses over and above the property’s price that buyers and sellers incur to complete a real estate transaction. These costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. They are paid when the property title is transferred from the seller to the buyer, marking the final step in the home buying or selling process.
By law, lenders are required to provide buyers with a closing disclosure three business days before a scheduled closing or settlement date. This document outlines all the fees and expenses that will be due at closing, giving buyers time to review and ask questions before finalizing the transaction.
Who Pays Closing Costs?
Both buyers and sellers are responsible for paying closing costs, though the specific allocation varies by transaction. Typically, buyers pay most of the closing costs related to obtaining a mortgage, while sellers cover costs associated with transferring ownership and paying real estate commissions.
Buyers generally pay between 2% and 5% of the purchase price in closing costs, with most of these expenses going toward lender-related fees. Sellers, on the other hand, can expect to pay between 8% and 10% of the sale price, including real estate agent commissions and various taxes and fees.
It’s worth noting that closing costs can be negotiated between buyers and sellers. Buyers can request seller concessions, where the seller agrees to cover some of the buyer’s closing costs. However, there are limits to how much a seller can contribute, depending on the type of loan, the buyer’s down payment, and whether the property is a primary residence, second home, or investment property.
Closing Costs for Buyers
For homebuyers, closing costs typically range from 2% to 6% of the loan amount. On a $300,000 mortgage, this translates to approximately $6,000 to $18,000 in closing costs. The specific amount varies based on factors such as location, loan type, and lender requirements.
Here’s a breakdown of common closing costs for buyers:
Loan-Related Fees
Application Fee: This is charged by the lender to process a mortgage application.
Origination Fee: Covers the administrative costs of processing a mortgage and is typically 1% of the loan amount.
Underwriting Fee: Paid to the lender for verifying the buyer’s financial information, income, employment, and credit for final loan approval.
Credit Report Fee: A charge to pull credit reports from the three major credit bureaus.
Discount Points: These are optional, upfront payments to the lender to reduce the interest rate on a loan.
Property-Related Fees
Appraisal Fee: Paid to assess the home’s fair market value.
Home Inspection: While not always required by lenders, many buyers choose to have a professional inspection to identify any issues with the property.
Pest Inspection: Covers the cost of a professional inspection for termites, dry rot, or similar damage.
Survey Fee: Charged by a surveying company to confirm a property’s boundaries.
Flood Determination Fee: Paid to determine whether the property is in a flood zone and requires flood insurance.
Insurance and Escrow Fees
Title Search Fee: Charges for analyzing property ownership records.
Title Insurance: Protects the lender and buyer if an ownership dispute or lien arises that wasn’t found in the title search.
Escrow Deposit: Some lenders require a deposit of two months of property tax and mortgage insurance payments into an escrow account at closing.
Homeowners Insurance: Evidence of a prepaid homeowners insurance premium is often required at closing.
Private Mortgage Insurance (PMI): Required with less than a 20% down payment, and a month of PMI may be mandated at closing.
Government and Legal Fees
Recording Fee: Charged by the city or county for recording public land records.
Transfer Tax: Tax levied by the state or local government to transfer the title from the seller to the buyer.
Attorney Fee: In some states, a real estate attorney is required to prepare and review home purchase agreements and contracts.
Closing Costs for Sellers
Sellers typically face higher closing costs than buyers, with expenses historically ranging from 8% to 10% of the home’s sale price. With the average home value in the U.S. at $362,000, seller closing costs can range from $28,960 to $36,200.
The majority of seller closing costs come from real estate agent commissions, which have historically been between 3% and 6% of the home’s sale price. However, it’s important to note that commission rates are negotiable, and there is no set percentage that must be paid.
Here’s a breakdown of common closing costs for sellers:
Real Estate Commissions
Traditionally, sellers have been responsible for paying both their agent’s commission and the buyer’s agent’s commission. However, this practice is changing, and whether the buyer pays their own agent is now up for negotiation and will vary from one deal to the next.
Title and Transfer Fees
Transfer Taxes: Most states charge some form of transfer tax to officially transfer ownership of the property. Some counties or municipalities may also charge local transfer taxes. The cost varies widely but is typically dependent on the home’s sale price.
Title-Related Fees: Home sellers in many areas are responsible for paying the costs of a title search and title insurance, which protect against potential ownership issues. These costs can range from $1,000 to $2,500 or more.
Other Seller Expenses
Escrow Fees: If any funds are held in escrow during the transaction, there will likely be fees owed to the escrow company. These can range from 1% to 2% of the home price.
Attorney Fees: Some states require home sellers to hire a real estate attorney, and even when not required, many sellers choose to do so to ensure their interests are protected.
Mortgage Payoff: If you still have a mortgage on the home you’re selling, it will need to be paid off before the sale is finalized. The amount will vary depending on your outstanding balance, and wiring the cash to your mortgage servicer may incur additional fees.
Seller Concessions: While not mandatory, it’s common for sellers to offer credits to cover some of the buyer’s closing costs, such as the cost of a needed repair. These concessions can help make a home more attractive to potential buyers.
Average Closing Costs by State
Closing costs can vary significantly depending on where you live due to differences in local tax laws, lender costs, and title and settlement company fees. For example, in Washington, D.C., closing costs including transfer taxes average a staggering $29,888, while in Missouri, they average just $2,061.
Here are some examples of average closing costs by state, including transfer taxes:
- New York: $16,849
- Washington: $13,927
- Delaware: $17,859
- Maryland: $14,721
- California: $7,953
- Florida: $8,554
- Texas: $4,548
- Illinois: $5,929
- Ohio: $4,223
- Missouri: $2,061
These figures highlight the importance of researching closing costs specific to your location when budgeting for a home purchase or sale.
When Are Closing Costs Paid?
Most closing costs are due on the day of closing, which is when the title of the property is transferred from the seller to the buyer. Money is typically wired to the receiving parties upon closing, or the buyer will bring a cashier’s check to the closing appointment.
However, some closing costs may be paid before the closing day. These include expenses such as home inspections, certifications, or land surveys. Home inspections, for instance, are usually completed within a week of an offer being accepted and are paid for at the time of service.
For sellers, closing costs are typically deducted from the proceeds of the sale at closing, so cash is rarely needed at the closing table.
How to Reduce Closing Costs
While closing costs are an inevitable part of real estate transactions, there are strategies to reduce these expenses:
For Buyers
Negotiate with the seller: Ask the seller to cover some of your closing costs as part of the purchase agreement. This is more likely to be successful in a buyer’s market where sellers are motivated to close the deal.
Shop around for services: Compare rates from different lenders, title companies, and other service providers to find the best deals.
Schedule the closing at the end of the month: This can reduce the amount of prepaid interest you’ll need to pay at closing.
Look for lender credits: Some lenders offer credits to offset closing costs in exchange for a slightly higher interest rate.
For Sellers
Negotiate real estate commissions: Commission rates are not fixed, so discuss options with your agent.
Limit seller concessions: While offering concessions can make your home more attractive to buyers, be strategic about what you’re willing to cover.
Time your sale strategically: In a seller’s market, you may have more leverage to negotiate favorable terms.
Understanding Seller Concessions
Seller concessions are a way for buyers to reduce their out-of-pocket closing costs by having the seller pay for some of these expenses. However, there are limits to how much a seller can contribute, depending on the type of loan:
Conventional Loans
For primary residences:
Down payments of 25% or more: Seller can contribute up to 9% of the loan amount
Down payments of 10% to 24.99%: Seller can contribute up to 6%
Down payments less than 10%: Seller can contribute up to 3%
For second homes:
Down payments of 25% or more: Seller can contribute up to 9%
Down payments of 10% to 24.99%: Seller can contribute up to 6%
For investment properties, the maximum seller contribution is 2% regardless of down payment.
FHA Loans
For FHA loans, the seller contribution limit is 6% based on either the appraised value or the purchase price of the house, whichever is lower.
VA Loans
VA loan seller concessions follow different rules depending on what they’re being applied to. The full amount of seller concessions can be applied to discount points, origination costs, surveys, appraisals, and credit report fees, up to 4% of the total loan amount. The remaining concessions can be applied to prepaid escrows or the VA funding fee.
The Importance of the Closing Disclosure
By law, lenders must provide buyers with a closing disclosure at least three business days before the scheduled closing date. This document details all the costs associated with the mortgage, including the loan terms, projected monthly payments, and itemized closing costs.
Reviewing this disclosure carefully is crucial to ensure there are no surprises or discrepancies at closing. If you notice any unexpected fees or changes from what was initially quoted, contact your lender immediately to address these issues before closing day.
Conclusion
Closing costs are a significant financial consideration when buying or selling a home. By understanding what these costs entail, who typically pays them, and how they vary by location and transaction type, you can better prepare for the financial aspects of your real estate deal.
For buyers, closing costs generally range from 2% to 6% of the loan amount, covering expenses related to loan origination, property assessment, insurance, and legal requirements. Sellers face even higher costs, typically 8% to 10% of the sale price, with real estate commissions making up the largest portion.
Being aware of these costs in advance allows you to budget accordingly, explore options for reducing expenses, and avoid surprises at the closing table. Whether you’re a first-time homebuyer or an experienced seller, factoring closing costs into your financial planning is essential for a smooth and successful real estate transaction.
To conclude, understanding closing costs is essential for anyone entering the real estate market in 2025. Whether you’re buying your first home or selling an investment property, proper preparation for these expenses will help you navigate the closing process with confidence. For more expert insights and the latest updates on real estate transactions, visit housingmarketnews, your trusted source for comprehensive housing market information delivered in clear, straightforward language.
