When home sellers set out to calculate how much money they’ll make from their sale, they often forget to factor in closing costs. It’s hard not to feel blindsided by these costs, especially because they come at the end of the sale, and it isn’t always clear what exactly you’re paying for.
What does closing mean?
Closing is the phase in the home selling process when money and documents are transferred in order to transfer ownership of the property to the buyer. In a successful closing, both buyer and seller fulfill the agreements made in the contract. The seller will pay off all loans on the property to clear title, and the buyer and their lender will wire transfer money to cover the balance owed on the purchase. Closing is facilitated by a third party called an escrow company, which ensures that all money, documents, and other items needed to close the sale are properly exchanged.
What are closing costs?
Closing costs are an assortment of fees—separate from agent commissions—that are paid by both buyers and sellers at the close of a real estate transaction. In total, the costs range from around 1% to 7% of the sale price, but sellers typically pay anywhere from 1% to 3%, according to Realtor.com.
While buyers have more items to pay for at closing, it’s often up to the seller to cover the commission for both agents. Closing costs for sellers are deducted from the profit you make on the home, unless you have low equity, in which case, you may need to bring some cash to the table to cover the expenses. If you’re wondering why closing costs vary across such a wide range, it’s because there are different fees and legal requirements for each state and municipality.
What expenses are included in closing costs that the seller is paying?
Title insurance fees
Title insurance ensures that the home is truly yours to sell, and protects the buyer’s investment in the case that someone else makes a claim of ownership on the home. Sellers pay the new owner’s title insurance premium. This number varies widely depending on where you live, and the title company you work with.
Loan payoff costs
Mortgage payments are paid in arrears, unlike rent, which is paid in advance. Paying off your existing loan may actually cost more than the remaining balance because lenders charge for prorated interest. One trick for getting a rough estimate of what you’ll owe is to add one mortgage payment amount to your current balance.
Some lenders charge prepayment penalties for paying a loan off early. These penalties can be anything from a percentage of your remaining balance, to a sliding scale fee based on the age of your loan. You’ll need to check with the lender to determine whether you have a prepayment penalty and what the costs of that penalty may be.
Unpaid HOA dues and HOA transfer fees
As the seller, you’ll owe any unpaid dues to your homeowners association at closing. The HOA may also charge fees for transferring the property to a new owner. Some of these transfer fees will be outlined in your home purchase contract. According to Movoto, you should expect the fee to cost between $100 to $400. You can also contact your HOA to get a clear understanding of what you will owe.
Transfer taxes or recording fees
Transfer taxes or recording fees are taxes charged by your state or local government when you transfer a title from one owner to another. Each state handles these differently. In some states, there are flat fees, while in others, the fees are a percentage of your sale price.
You can find your state’s specific information on the National Conference of State Legislatures website. Here’s a breakdown of transfer taxes in a few different places:
– In Arizona, the transfer tax is a flat fee of $2.
– In Texas, there are no transfer taxes.
– In Atlanta, state transfer tax is $1 for the first $1,000 and $0.10 for each additional $100. There is also an intangible recording tax of .3%, which cannot exceed $25,000.
– In Nevada, the state transfer tax is .26%. The county transfer tax varies depending on population size. For counties with up to 700,000 people the tax is .13%. For counties with more than 700,000 people, the tax is .25%. Counties with a population under 700,000 may also impose an additional transfer tax of .01%.
Some states require an attorney to represent you at closing. Attorney’s fees can cost anywhere from $150 to $350 an hour. According to Wallethub, expect to pay $500 to $2,000 if you hire an attorney, depending on the complexity of the transaction.
If you’ve agreed to cover any of the buyer’s closing fees in your contract, you’ll pay for that at closing. Buyer credits are entirely dependent on what you negotiate in your agreement.
Calculating your closing costs
Every sale is different, so you may want to consult your agent early in the process to get a clearer sense of how much money you’ll need to come up with at closing. They’ll be able to give you a ballpark figure based on similar transactions. If you want to do some research yourself, do your math with one of the closing cost calculators that are available online.
Everyone deserves to have a clear idea of the fees they’ll pay at the close of a home sale. (We have also broken down the total cost of selling a home in a separate blog post.) Hopefully, this helps clarify closing costs and gives you the information you need to sell your home with confidence.
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