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What are Closing Costs?

Closing costs are an itemized list of fees or cost components paid by the buyer for the services to get the mortgage approved. While the majority of the costs are paid by the buyer, some of the costs can be paid by the seller if both parties have agreed to do so. 

If you want to see a final consolidated list of closing costs, the closing disclosure is the best document. It shows all the cost components listed against each party. 

How much are Closing Costs?

Closing costs generally range between 2% - 5% of the total property value. That means a property worth $500,000 may cost you somewhere between $10,000 to $25,000 as closing costs. 

The buyer may choose to pay the closing costs upfront during closing or may opt to roll the amount in the mortgage which is not the best thing to do as the buyer will have to pay interest on the closing cost as well.

How do you calculate your Closing Costs?

The Closing Disclosure segments the costs into more than 10 different sections. However, we believe that the closing cost amount is composed of no more than 4 cost components. These are:

  • Mortgage Closing Costs. Mortgage closing costs are a collective term for costs expended towards mortgage underwriting, appraisal costs, the survey fee, and escrow charges as well. 
  • Title Fees. The Title fee is the amount spent on searching, verifying, and making changes to the title of the property.
  • Real Estate Transfer Taxes. Transfer taxes are charged by the state government during the transfer of property from the seller to the buyer.
  • Recording Fees. The recording fee is the amount charged by the respective county office in order to record the new deed. 

Who pays for the closing costs?

The majority of costs are paid by the buyer. Costs for loan origination, appraisal fee, survey fee, pest inspection fee, recording fees, transfer taxes, escrow are generally paid by the buyer. However, in many cases, the transfer tax could be paid by the seller and not the buyer. Additionally, the seller may also pay for HOA dues and property taxes from the date till the date they have ownership of the property.

Who are Closing Costs paid to?

  • Mortgage closing costs go to the mortgage underwriter, lender, and the mortgage company as a whole. All the paperwork that goes behind Mortgage underwriting, loan processing, etc. are services that you pay in the form of mortgage closing costs.
  • The title fee goes to the title company that runs the title search and verifies the identity of the owner.
  • Transfer taxes go to respective state governments where the property is physically located.
  • Recording fees go to the respective county where the property is physically located.

What is a Closing Estimate?

A Closing Estimate is a document with a myriad of costs that the buyer is supposed to pay during the closing process. Closing estimates come in multiple formats that are specifically made according to the transaction type and stage of the transaction.

For example, a closing disclosure shows the final amount a buyer is obliged to pay at the closing date. On the other hand, the ALTA Settlement lists all back and forth payments that are credited or debited into the seller’s or the buyer’s account.

Overall, there are 6 major closing estimate types that help both parties navigate through the closing process with transparency. Let’s briefly look into these closing estimate types.

What is a Seller's Net Sheet?

A seller's net sheet shows an estimated amount the seller is supposed to receive after all the deductions after the transaction. These deductions are nothing but the various costs deducted from the seller’s account during the closing process. The seller net features around 17-18 cost components in total. Read our blog to learn about seller net sheets in detail. 

What is a Buyer Net Sheet or Buyer Estimate?

A buyer estimate or buyer cost sheet gives an estimated amount, the buyer is obliged to pay while buying a home. The document lists property fees, taxes, mortgage fees, title fees, and a number of other costs that the buyer must pay in order to transfer the deed to their name. You can read about the buyer cost sheet in one of our previous posts here

What is a Loan Estimate?

The Loan Estimate shows ballpark estimates that allow the buyer to predict the amount they would be playing at the closing. The Loan Estimate precedes the Closing Disclosure as an initial cost estimate. The loan estimate also allows the buyer to accept or reject the financial clauses associated with the mortgage.

To know more about the Loan Estimate, read our guide that lists all the costs components of the documents. 

What is a Closing Disclosure?

The closing disclosure is a 5 pager document provided by the lender to the buyer. The closing disclosure shows the final closing costs for the mortgage along with some terms and conditions established by both parties for the transaction. The closing disclosure has more or less the same cost components as the loan estimate in cases where the buyer is satisfied with costs listed by the lender. However, a few components may change if the buyer does not agree. 

Here is a quick guide we have put together to explain the document in detail. 

What is an ALTA Settlement Statement?

The ALTA statement is an itemized list of all the cost components that the seller and the buyer are supposed to pay during the home closing process to multiple parties. The statement segregates these cost components into 8-9 sections. Each cost component could either be debited or credited to the concerned party. 

The ALTA statement thus gives a complete ledger of all the debits and credits marked against individual cost components. 

There are 4 types of ALTA Statements in total. Read our guide on ALTA settlement statements to learn more. 

What is a HUD-1 Form?

The HUD-1 Settlement Statement form is used at real estate closings to process and approve reverse mortgages and nongovernment loans that are not RESPA compliant.

HUD 1 used to be the main document that showed all the cost components the buyer and the seller were going to pay at closing before the closing disclosure came along. The HUD 1 is still seen with lenders and agents but its importance has certainly reduced in the present day. 

Read more about the HUD-1 form in this guide we put together at Elko. 

What Closing Costs are Part of Escrow?

All the taxes and insurance related costs are clubbed as escrow costs. All states have different due dates and schedules for collecting taxes. If you have an escrow account, the escrow evens that cost out throughout the year and pays it on your behalf. This is particularly useful for buyers who may not be residing in the state where the property is physically located.

How do you reduce Closing Costs?

An obvious way to reduce closing costs is to look at the costliest cost components and try to reduce them. You can also bargain with the lender on the lender fee or may try to pursue the seller to bear some costs. Here are a few tried and tested ways people use to reduce their closing costs. 

Find the costliest components. Since title insurance and settlement services cost you the most, you should try to reduce these costs. Have a list of title companies, compare their prices, and opt for the lowest or the one that you think is giving the best value. 

You can follow the same strategy when it comes to inspection and survey fees as there could be significant differences in price. 

  • Compare loan options. Ask your lender to table multiple loan options from multiple companies. Compare the price difference, advantages, and disadvantages and take a call. It is also necessary that you ask for a legally binding loan estimate to derive a fair comparison. 
  • Let the seller contribute more. This is upon the buyer’s agent and better done when the market has a lot of inventory. Buyers may agree to pay a few costs themselves to sell the property as quickly as possible. 
  • Cut back on the lender's fee. Try to negotiate and get some discount on the lender’s fee. Make sure that you are not talking to only a single lender. If you keep multiple lenders on standby, a lot of them will start to impress you with rate cuts. 
  • Wrap the closing costs into the loan. Wrapping up closing costs in the loan is not the best idea as you will be charged interest on the closing cost as well. However, if you are falling short of cash, it is an option the buyer can evaluate. 

Closing costs are due when you are singing the documents. They must be paid in one way or another in order to complete the transaction and tranfer the ownership of the property.

Additional Closing Resources

Here are some additional closing resources that we think you might find useful.