Closing Costs

Closing costs is a real estate term describing the additional expenses a buyer might pay over and above the purchase price of the property.

What are closing costs?

When buying a home, your final buying price is negotiated. But there’s also plenty of bureaucracy and paperwork that will add on some extra costs at the end of the sale.

These extra fees are your ‘closing costs.’ Within 3 days of signing your loan agreement, you’ll usually know which closing costs you’ll need to pay. These costs will be listed in a document that gives you a breakdown of any additional costs, called a Good Faith Estimate.

Because your closing costs can add up, you should always factor in these fees when buying a new property.

What are some examples of closing costs?

Your closing costs will likely include the following:  

Attorney fee: A fee charged by the real estate lawyer you hired to review and prepare your agreements and contracts.

Property appraisal fee:
A fee paid on behalf of your mortgage lender to properly assess the home’s fair market value.

Lender’s title insurance:
A fee paid to the title insurance company that protects the mortgage lender against any dispute in the property’s title. This fee will be mandatory by the lender. 

Homeowners insurance Your mortgage lender will require you to purchase homeowners insurance, and will likely have you prepay one year worth of premium.

Home inspection
The cost to have a licensed home inspector assess the condition of the house. 

Property tax
A fee paid by the buyer that goes towards local government. 

These are examples of the standard closing costs, but depending on your property or type of mortgage, you might also need to pay:

Homeowners Association (HOA) transfer fee: If you’re buying a condo,  your HOA will charge you an HOA fee to pay for services and improvements. 

Owner’s title insurance : A fee paid to the title company that protects you against any disputes with the property’s title. 

Recording fee
: A fee paid to the government to register the sale of the property and make it a matter of public record.

FHA fees
: If you have a Federal Housing Administration loan (FHA) you’ll need to pay an upfront premium payment of 1.75% of the loan amount.

Transfer tax:
To transfer the title of your new property, you’ll need to pay a fee – sometimes pricy in states, like WA, NJ, NY, NH and DC. 

Who pays closing costs?

The party responsible for paying closing costs is specified in the contract, and this is something you can negotiate. Usually, the buyer will have to pay most of the closing costs with the exception of the real estate commission, which is paid for by the seller. But sometimes, both the buyer and seller are responsible for some of the closing costs.

There are exceptions to the rule though, like in North Carolina, where the seller pays the majority of the closing costs.

How much are closing costs?

The price of your closing costs will depend on where you live, since property tax ranges from state to state. According to Zillow, your closing costs will range between 2% — 5% of your purchase price. So if you buy a home for $250,000, you should expect to pay between $5,000 – $10,000 on your closing costs. Closing costs are typically a one-time payment paid when closing on a property.

Can you negotiate closing costs?

When it comes to closing costs, you can negotiate certain fees, like title insurance or pest inspection – but you can’t negotiate your property tax. During your offer stage, you can also try to negotiate with your property seller about which costs they agree to cover. Just make sure to settle who pays what before you sign your contract.

Why are closing costs so high?

Taking out a loan and buying a property is expensive, and in addition, there’s a load of paperwork and bureaucracy involved which when accumulated can end up being pretty pricey. At the end of the day, if you have your eyes set on your dream property, you’re going to want to ensure your new home has been insured, protected, and made official in the eyes of the law.

Please Note: These definitions don’t alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade. They are intended for educational purposes only - they’re not meant to be used in lieu of professional legal or financial advice. We’ll do our best to keep them updated, but they may not always reflect current industry developments. Feel free to use the terms with attribution (friends don’t let friends plagiarize!)
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