One of your last steps to buying a home is paying closing costs, but what are closing costs and how do you calculate them? Do closing costs vary if you buy a new home versus a resale home? Who is responsible for covering what costs? We’ll discuss all this and more in this article, along with some options if you aren’t sure that you can afford the closing costs as a buyer.

What are Closing Costs? 

To start, lets breakdown what closing costs are. Closing costs are the expenses, beyond that of the home’s price, that buyers and sellers typically incur while completing the purchase of a home. These costs could include loan origination fees, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.

How to Calculate Closing Costs

Closing costs are typically between 2 to 5 percent of the home’s purchase price, with fluctuations depending on the cost of different services within in your area. Your lender is required by law to state these costs in a "good faith estimate" within three days of a home loan application.

Once you have an estimate of your closing costs, it’s a good idea to figure out how you’re going to cover them. You’ll be expected to write a check for closing costs before you close on your home, and most agents will wait for the check to be cleared before everything else can be finalized.

Most closing costs are the responsibility of the seller because the costs are involved in writing up a mortgage, but buyers can also be responsible for aspects of the closing costs. Here are what some of the most common closing costs are and what they cover.

Property Related Fees

One area of closing costs are related to the property itself. These fees include items like the appraisal fee, which is used to determine what the home is worth as well as a home inspection, which is required by most home lenders to insure that the home is up to code and in decent repair. Costs for these fees can vary dramatically depending on your state and location, as they are driven by the local marketplace.

Loan-Related Fees

Closing costs typically cover your application fee for a new loan, or an assumption fee if you are taking over an existing mortgage. You’ll also be responsible for paying the loan origination fee, which is charged by the lender for evaluating and preparing your mortgage loan and typically amounts to about .5% of your total loan. If you worked with a mortgage broker to find your loan, you’ll also pay them a commission that averages from 0.5% to 2.75% of the home’s purchase price.

Mortgage, Taxes, and Title Fees

Other closing costs could include mortgage insurance, upfront property taxes, title search fees and costs associated with that, including owner’s title insurance and lender’s title insurance. This insurance is to cover costs if a title search shows later on that the home already belonged to someone else. You’re less likely to incur this cost when working with new home builders versus when buying a resale home, since the home didn’t exist prior to purchase.

Does the Buyer Always Pay Closing Costs?

Both buyers and sellers incur different fees during closing and may contribute different amounts to the overall closing costs. When using an agent, sellers typically have to pay about 6 percent of the home’s cost to an agent where buyers usually only have to pay between 2-5 percent of the home’s costs. Because of this difference, often times buyers are fully responsible for covering their portion of the closing costs.

That said, in some scenarios, it is not unheard of to have a seller cover a portion or all of the buyer’s closing costs—particularly when the market is slow or the buyer agrees to a higher purchase price. This coverage can really benefit some buyers who may not have the funds upfront to afford the high costs and prefer to pay down those costs over the course of their loan.

Are Closing Costs Different When Buying New vs Retail?

Does buying a new home affect closing costs? When purchasing a brand new home, closing costs are still roughly the same. That’s because the steps required to close on a home remain the same—your new home still has to pass an inspection, for example. However, some homebuilders may be willing to negotiate or lower these costs, especially if you agree to work with their in-house lender. In some cases, an in-house lender can make it easier for certain people to afford a home.

Estimating closing costs can feel a little overwhelming and sometimes, buyers aren’t sure how they’re going to afford them in addition to a down payment on their new home. But that’s why it’s important to work with a mortgage lender you can trust and house hunt for a home you can afford. If you’re a first-time homebuyer, you might need even more guidance. In that case, it might be easier to work with new home builders who have an in-house lender.

Buying a new home can be fun and exciting. Don’t let the stress of it get in the way too much, and remember that a little pre-planning can help make everything run much smoother.

Contributed to Your Home blog by Brittney Villalva

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Published 2.16.2021