Introduction to Average Closing Costs and How to Calculate Closing Costs on Your Home
So you have finally found the home of your dreams. It is located in the neighborhood you have longed to get in to, and it fits into your budget—barely.
Though you have had to squeeze the numbers in order to qualify for a loan, you finally have the money in hand to buy your $300,000 dream home.
What you weren’t prepared for, however, were the high closing costs that you hadn’t counted on. Determining how much are closing costs is one of the most important aspects of buying a house that many first-time buyers overlook.
Image Source: Typical Closing Costs
Mortgage closing costs for the buyer of a new home usually include a variety of charges and fees that can add up to several thousand dollars.
Many real estate agents simply assume that the buyer understands and accepts the average closing costs for a home. However, it is important that, as a buyer, you discover how much are closing costs on a house that you plan to buy.
In this brief article, AdvisoryHQ will help you understand what are closing costs and who pays closing costs on the purchase of a home.
Furthermore, we will look at why it’s important to factor in the closing costs on a house and how you can negotiate the typical closing costs to get the best financial deal on the home you plan to buy.
We will go on to look at how banks calculate the typical closing costs for both buyer and seller before going on to look at the average closing costs for different types of homes and real estate transactions.
What Are Closing Costs When You Buy a House?
According to Wikipedia, “closing costs are fees paid at the closing of a real estate transaction. This point in time, called the closing, is when the title to the property is conveyed to the buyer.”
There are usually two types of typical closing costs. The seller of the house comes up with a proposed price for the piece of real estate that they want to sell. If they are having trouble selling it on their own, they then employ a real estate agent who helps them publicize their home to potential buyers.
When the house sells, the real estate agent collects his or her real estate commission, which is one part of the closing costs.
The buyer, however, should be more worried when it comes to figuring out what are the closing costs on a home. Since most buyers have to take out a decently sized loan from a bank in order to purchase their home, there are a number of mortgage closing costs associated with the loan.
The average closing costs on a house usually include a number of charges and fees. When discovering how to calculate the closing costs on the home you are purchasing, you should take into account some of the following fees:
- Recording fee
- Notary fee
- Appraisal fee
- Origination fee
- Prepaid interest
- Prepaid insurance
- Credit report fee
- Flood certification fee
- Tax servicing fee
- Recording fee
- Notary fee
- Bank processing fee
- Title insurance
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Who Pays Closing Costs?
Before asking yourself how much are closing costs on a house, you need to determine who pays the closing costs. As mentioned above, the typical closing costs on a home are divided between the buyer and the seller.
It is most common for the seller to pay the real estate commission fee, which is generally between 3 and 5% of the value of the home being sold. That means that the average closing cost for the seller of a $300,000 home would be between $9,000 and $15,000.
While the closing costs associated with real estate commissions can be avoided through selling a home on your own, the benefit of hiring a real estate agent is that he or she can help you sell your home for more money.
Some sellers may be surprised at how much are the closing costs that real estate agents make, but if they were to help you sell your home for $15,000 more than your original proposed price, then their commission would basically be offset.
On the other hand, the buyer of the home usually assumes the mortgage closing costs that include the variety of fees we mentioned above. While the seller usually has a pretty good idea of how to calculate the closing costs associated with real estate commissions, the closing costs on a house for a buyer can be more difficult to understand.
It is always a good idea as a buyer to ask your bank about the mortgage closing costs associated with the bank loan you take out. Furthermore, to garner a better idea about how much are closing costs going to be on the house you want to buy, you should also sit down with the real estate agent who showed you the home.
The decision about who pays closing costs, however, is not set in stone. The average closing costs on a house can be divided differently between the buyer and the seller. As we will see below, for buyers who are in a tight economic situation, there are possibilities to alter who pays the closing costs on a house in a mutually beneficial agreement.
The Importance of Factoring in Closing Costs on a House
Many first-time buyers may get excited at the published price of a home or at the low monthly payment of a mortgage set up with a bank.
For people without a lot of extra cash, spreading out the cost of a house over thirty years is often the best way to afford a home for your family. Closing costs, however, can often be an unforeseen and prohibitively expensive one-time cost that many people don’t plan for.
Image Source: Average Closing Costs
It is important to estimate the closing costs on the home you want to buy so that you can avoid the awkwardness of having to return to the bank to renegotiate your loan in order to have access to the cash needed to pay the closing costs on your home.
By simply asking your bank and the real estate agent who showed you the house how much are closing costs on a house, you can budget accordingly. Furthermore, by learning exactly how much are closing costs on the home you want to buy, you may be able to negotiate a better deal that accommodates your personal financial situation.
While most of the time the buyer pays for the mortgage closing costs associated with the purchase of the home, it is possible to negotiate a sharing of those closing costs between the buyer and the seller.
If you don’t have a whole lot of extra cash to pay the average closing costs on the home you want to buy, then you can ask the seller to pay a portion of the typical closing costs in exchange for raising the purchase price of the home.
The real estate website Zillow.com advises that “credit for $5,000 to go toward closing costs will be a much greater bang for the buyer’s buck. The price reduction won’t amount to much more than a few dollars per month over the length of the home loan. But saving $5,000 at the closing will be money right back in the buyer’s pocket.”
If you are worried about not having enough cash to pay the closing costs on a house, then consider negotiating with the seller to find a deal that can be more beneficial for both.
How Banks Calculate Typical Closing Costs
The typical closing costs for a home can include a number of costs and fees that add up quickly. For the seller, it’s important to understand that the average closing costs on a house can amount to much more than just the real estate commission.
If you have a home loan on the house you are selling, the mortgage payment balance will obviously cut into your profit from the home you are selling. Furthermore, some banks will also charge a loan payoff fee or a prepayment penalty as part of the typical closing costs. You will need to ask your bank if these charges apply to you when you estimate the closing costs you have to pay.
Furthermore, lien releases may be applied to your home or property if you owe back taxes to the state or local government. These fees will also form a part of your average closing costs.
While sellers oftentimes hope to make a decent profit from the sale of their home, the closing costs on a house can, and often do, add up quickly. On top of the fees already mentioned, as a seller you may also have to pay recording fees, notary fees, escrow fees, title search fees, and even a termite letter (required in some states) as part of the average closing costs on your house.
When you estimate the closing costs on your house, it is important that you understand how these fees will add up. According to realtor.com, “once you receive an offer, or maybe even when you sign your listing agreement, your real estate agent should give you a Seller’s Estimated Net Proceeds worksheet, which will list the expenses that will be deducted when you close.”
These typical closing costs should go into your decision concerning the listing price of your home.
Average Closing Costs on a House
Whether you’re determined to sell your house or on a mission to purchase your dream home, it is important that you research the average closing costs before moving forward. While typical closing costs do vary from state to state and depend on the characteristics of the home being bought or sold, there are a number of tools out there to help you estimate the closing costs that you’ll have to pay.
Bankrate.com offers a quality map of the United States where you can find the typical closing costs for the state where you live. What’s more, this website will give you an itemized breakdown of the different fees and charges associated with the average closing costs per state.
For example, a $200,000 home in New York would have an average closing costs of $2,560 comprised of fees charged by lenders and other third parties. In comparison, the typical closing costs for a similar home in Kentucky would only amount to $1,874.
Another helpful tool to help you determine the typical closing costs for the home you are selling or buying can be found on Smartasset.com. This average closing cost calculator will help you determine what you’ll pay in closing costs. The amount is determined by asking you where you live, the cost of the house you want to buy, and your down payment amount.
For example, the average closing costs calculated for a $300,0oo home with a 20% down payment in Chicago, Illinois, would amount to $7,225 including origination charges, title insurance, inspection fees, and other service fees. On top of that, another $3,602 would go to escrow expenses and other pre-paid expenses. Your typical closing cost, then, would amount to $10,827.
Your 20% down payment would amount to $60,000, meaning that you would need a total of $70,827 cash for the settlement on your home. Learning how to estimate this closing cost is an important step, and this online calculator not only helps you find your average closing costs in a few simple steps, but it also gives you the option to view the details associated with those costs.
Closing Costs: The Final Step to Your New Home
The excitement of buying or selling a home can lead many people to simply overlook the average closing costs that comes with the real estate business. By taking the time to educate yourself on what are closing costs and using the online tools provided above to learn how to calculate your closing costs, you can be better prepared to take that final step that will lead you into your new home.
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