What are Closing Costs?
Real Estate Terms and Definitions:
Quick Definition: All costs paid by the seller or buyer at the end of a transaction. This may include such items as title search and examiner fees, escrow, lawyer's fees, title insurance premiums, deed recording fee and transfer tax
In-Depth Explanation of Closing Costs
Closing costs in a real estate transaction come from a number of sources. Taxes and fees due to government agencies, costs for escrow or attorney closing services, title search and title insurance fees, and real estate commissions are all part of the potential closing costs in a sale.
Closing costs can vary widely based on your location. Taxes vary by region, individual service providers have different fee schedules, and real estate commissions, which are negotiable, vary by service model and the individual provider. While buyers and sellers would like to get an estimate of closing costs online, it would be irresponsible for us to guesstimate a number that could change significantly for any individual home buyer or seller.
What we can provide is a breakdown of who pays most of the closing costs in a transaction. In Washington, the escrow fee is usually split 50/50 between the buyer and the seller. We use escrow for closings as opposed to attorneys in most cases. Remember that what is "customary" can always change in your situation, so it's always best to read your contract, consult with your Realtor, and with a real estate attorney where necessary. Sellers will usually pay for an owner's policy of title insurance. This is in effect a protection for the buyers to ensure that the property can be legally transferred to them. Washington home sellers pay a real estate excise tax as part of their closing costs.
Buyers will usually pay the numerous lender fees if they are financing the property. Origination, discount, processing, underwriting, and many other fees will be a part of the lender closing costs. Buyers should take into account the total fees, along with the interest rate and payments to determine the value of the mortgage they're being offered. The Annual Percentage Rate, or APR, is often used to combine these fees and the interest rate into one measure of lending value.
Buyers will also usually pay for a title insurance policy for their lender. This insures the lender that in case the property can't be legally sold, the lender can recoup the costs of the loan which was granted for the property.
How Closing Costs could affect your real estate transaction:
Closing costs can affect a buyer's cash available to close a home. They can't be "wrapped into the loan" in many cases as you could in a refinance. This means that the buyer needs the cash to pay for the closing costs and the down payment, or the seller will need to credit some of their proceeds from the sale to the buyer.
Whether or not a seller is willing to give the buyer a credit is dependent on a number of factors. The financing being used must allow a seller credit. The buyer needs to give the seller a reason to offer such a credit as well. The closing cost credit is a net loss to the seller. In a buyer's market where sellers are more motivated, sellers may agree to the credit as a concession.
In cases where the sellers have the upper hand in the negotiation (an inventory-starved market), buyers will often have to increase the purchase price they're willing to pay to make up for the closing cost credit that the seller is allowing for. All parties should be aware, however, that the property still needs to appraise for the full purchase price to avoid financing issues. The purchase price cannot be artificially inflated above market value just to make room for the seller to credit closing costs to the buyer.
Want to know more about closing costs?
This post is for informational purposes only, home buyers and sellers should not rely upon it to make decisions. Consult with a licensed real estate broker and/or real estate attorney before making real estate related decisions.
We have real estate brokers, mortgage lenders, inspectors, attorneys, title officers, and others who can answer your real estate-related questions. Give us a call or send us an email and we can put you in touch with someone who can answer your closing costs questions or any other questions about home buying, selling, and the real estate world.
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Sam DeBord is Managing Broker with Seattle Homes Group and Coldwell Banker Danforth. Our team serves home buyers and sellers in Seattle, on the Eastside, and across the Puget Sound Region.
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