Facts about closing costs for buyers and sellers

"Closing costs" is a general term for the costs involved in finalizing the sale of a home. Both buyers and sellers need to pay some of the costs. However, sellers can deduct closing costs from the proceeds of the sale, while buyers need to be prepared to pay these costs at closing. That makes it especially important for homebuyers to be prepared.

Closing costs vary by state, city and county, but on average, they're between 2% and 5% of the home price.^Footnote1 That's in addition to the down payment for the buyer and any real estate agent commissions for buyer and seller.

If you're buying a home, you'll get an estimate of closing costs within three days after you apply for a mortgage. Then, a few days before closing, both buyers and sellers will get a Closing Disclosure that will tell you exactly what your costs will be.

Again, costs vary by location, but these are some of the common costs that buyers should plan for:

• An earnest money deposit paid when you make your offer; this will be held in escrow and applied to your costs at closing.
• An appraisal fee and a home inspection fee.
• Loan origination fees and any other fees charged by your lender, including discount points (if you're paying them) and mortgage insurance, if needed.
• Additional fees for credit reporting, a flood determination, tax monitoring service, title search and title insurance.
• Government fees such as recording fees and transfer taxes.
• Possible other costs such as prepaid property taxes and homeowners insurance (buyers often pay up to six months in advance).
• You'll also pay for the cost to close the transaction, whether using an attorney or an escrow or title officer, depending on the laws for your state.

While generally the homebuyer pays more of the closing costs, sellers typically pay some too. These may include:

• Title costs — in some locations, the seller pays for title search and title insurance.
• Transfer taxes; these vary by state and/or county.
• Property tax prorated up until closing.
• Homeowners association fees up until closing.
• Seller concessions: As a seller, you may agree to pay part of the buyer's costs, either to make the deal more appealing or to compensate for a problem found during the home inspection.
• Mortgage payoff if you still owe a balance on your mortgage.
• Attorney fees; some states require that you hire a real estate attorney.

In the past, sellers usually paid the commission for both their own agent and for the buyer's agent. Now, it's still very common for sellers to pay the fee, but they're not required to. Homebuyers now must sign a contract with their agent that specifies the fee, and who pays the fee may be negotiated as part of the offer.^Footnote2

Since lender costs can be significant for homebuyers, when you're choosing a lender, compare closing costs from different companies. Some lenders may offer discounts, or a credit against closing costs in exchange for a higher interest rate. Once you've chosen a lender, check the document and processing fees in your loan estimate to be sure all are correct. You also may be able to shop around for title insurance.

Many state and local governments offer closing cost assistance programs to first-time buyers with modest incomes. Your lender may be able to help connect you with programs. You can also ask the seller to help with closing costs, especially in a buyer's market or if the home has been on the market for a while.

It's important to plan ahead for closing costs so you know where you stand. If you're selling, you'll want to maximize your profit. And if you're a homebuyer, you'll want to avoid draining your savings. Once you're in your new home, you'll need cash on hand for maintenance or emergency expenses.