Closing Costs: A Basic Guide

by Lauren Caggiano

When you buy a home, it’s understood that you have to account for ancillary costs. Doing your homework is part of being a responsible consumer, after all. Closing costs enter the equation, but who pays them isn’t always cut and dry.

That’s because these fees are paid according to the terms spelled out in the purchase contract made between the buyer and seller. In most cases, the buyer pays for the bulk of the closing costs, but there are cases when the seller may have to contribute, too.

What are Closing Costs?

Because this can be confusing, we’ve put together a basic overview of how closing costs work. First, it helps to understand the term. Put simply, closing costs are the funds due at the time of the closing of the property. These fees usually amount to 3 percent to 5 percent of the total purchase price and are split between the two parties. In other words, if you buy a $100,000 house, you can expect closing costs of between $2,000 and $5,000.

The buyer usually takes care of the lion’s share of these costs, but the seller picks up the local taxes and municipal fees. The buyer is usually responsible for attorney fees, credit report fees, loan origination fees, inspection fees and the like. It is worth noting that real estate agent fees are not a closing cost, but they are a cost to be paid at closing, so there can be some confusion there.

There are ways for the buyer to reduce the financial burden at closing, however. For instance, the buyer can request that the seller credit the buyer a pre-determined amount of money at closing. This would be above and beyond the purchase price. This arrangement means that the loan amount is reduced, which can make the home more affordable in a lot of cases.

Understanding Escrow

Escrow fees are other variables in this context. Escrow is another name for a protected savings account and most of the time this obligation is split between the buyer and seller. Escrow means these fees are held in a neutral bank account for the period of time it takes to close on the property. Escrow can be a flat rate or can cost as much as 1 percent of the total purchase price. This fee is designed to cover the cost of transferring the funds as well as accounting for administrative costs.

Bottom line: Buying a home is no minor endeavor. When you have a better picture of your financial obligations, you can better plan, so you’re set up for success. Also, know that you can use your leverage to negotiate, as a buyer. Presenting a strong offer, offering a quick close, and being flexible in general can help your case. Also know it’s quite common for sellers to pay both sides of closing costs if they’re eager to get the property sold. You can always put this request in your offer if you’re strapped for cash. The worst thing they can say is, no, after all. The proper negotiation skills could save you some money and mental strain.

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