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.
Here’s what we’ll cover:
- What does closing mean?
- What are closing costs?
- What is included in closing costs?
- Who pays what closing costs?
- How to calculate your closing costs?
- Should you pay the buyer’s closing costs
- Final thought
What does closing on a house 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.
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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 the closing of a house, 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.
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What is included in closing costs?
You can typically expect the following costs when you close the sale:
We summarized the types of fees below. Click on the cost type, and you’ll jump directly to the description.
|Type of cost||Average fee|
|Loan payoff fees||~0.5-1.5 percent of the sale price|
|Settlement or attorney fee||$150 to $500 for attorney fee|
|Mortgage payoff / prepayment penality||Variable|
|Outstanding amounts owed on the property||Variable|
Here are the types of closing fees in more detail:
- This makes sure you are the rightful owner of the property and that there are no outstanding claims or judgments against the property.
- Average cost is $300 to $600, according to Realtor.com
- The lender and the buyer usually obtain their own title insurance policies, which helps protect them in case a title problem arises after closing.
- Average cost is $1,000, according to Realtor.com
- This ensures there are no major issues with the home’s structure or systems.
- The cost is $300 – $500, according to Nerdwallet
- This report verifies whether the property is worth as much as the seller is borrowing from the lender.
- The cost is $450 to $650, according to Realtor.com
- For loans, many states require a survey, which shows where the property’s legal boundaries are.
- The cost is $350 to $500, according to Realtor.com
- The lender will run a credit report on the buyer with one or more of the three major credit reporting bureaus.
- The cost is $20 to $50 per report, according to Realtor.com
Loan payoff costs
- These include application and assumption fees, prepaid interest and loan origination fees
- Around 0.5 percent – 1.5 percent of sale price, according to Money Crashers
Mortgage payoff / prepayment penalty
- If you owe anything on the property’s mortgage, you will pay this amount at closing. Some lenders charge a penalty for paying your loan off before the end of the mortgage term, according to Marketwatch. 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.
Outstanding amounts owed on the property
- This includes property taxes, utility bills, homeowners insurance and HOA dues (if applicable). These amounts will be prorated to the closing date.
- Cost: variable
- Depending on your local and state laws, you’ll likely be charged taxes on the sale transaction. These are calculated based on the property’s value and local laws. Your state and county taxing authority’s website will have information about your local tax rates. You can also ask your real estate agent.
- Cost: variable
- Your escrow agent, title agent, or attorney will file the deed transferring the property to the buyer with the appropriate county office. Each county sets their own recording fee.
- Cost: variable
Settlement or attorney fee
- A settlement fee is paid to the escrow or title agent who handles your closing. If an attorney is handling the closing, you will pay attorney fees instead.
- Cost: $150 to $500 for attorney fee, according to Realtor.com, and the settlement fee is around $2 per $1,000 in sales price, according to Money Crashers
Any additional state requirements
- Check with your agent or attorney for state-specific requirements not mentioned here. These may include a septic system certificate or flood certification.
Fees vary widely as different states and municipalities have different requirements. For instance, Bankrate reports that average total closing costs for a $200,000 loan in New York are $6,843, while average closing costs for a similar loan in Iowa are only $2,114.
The buyer may ask you to pay some or all of their closing costs. If you agree to do so, this will be reflected in your net proceeds.
Sellers are usually also responsible for paying both real estate agents’ commissions, which can cost another 5 to 6 percent of the sale price. Your closing costs, as a seller, will be deducted from proceeds you make on the home, unless you have low equity, in which case you may need to cover some expenses out of pocket. The amount of money you walk away with after these costs is referred to as your net proceeds.
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How to calculate closing costs?
As we’ve seen, closing costs depend on a number of factors, including the property’s value and the requirements of your state and municipality.
Your costs at closing can vary widely depending on all of the above items, especially your loan payoff costs, title fees, as well as the commission rates of the agents involved. You should also take your property’s value and the requirements of your state and municipality into account.
To get an estimate of your net proceeds, use our home sale calculator. You can input items like moving costs, repairs, and agent fees to see how it all tallies up.
Should you pay the buyer’s closing costs?
Sometimes, a seller may offer to pay part or all of a buyer’s closing costs. This is known as a seller concession ie an offer to sweeten the deal. Doing so may make your property more enticing in a competitive market.
A buyer may also ask for a concession during the renegotiation process. For example, if an issue arises during the home inspection that you are unable or unwilling to pay for, the buyer may request a concession to make up for this. Discuss any possible concessions with your agent to make sure your net proceeds from the sale align with your goals.
When you close with Opendoor, you don’t need to worry about sweetening the deal. You get a competitive, all-cash offer. We complete a home condition and repair assessment. And then you choose your close date. It’s that simple.
Everyone deserves to have a clear idea of the fees they’ll pay at the close of a home sale. Hopefully, this helps clarify closing costs and gives you the information you need to sell your home with confidence.
This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.