When it comes to buying a home, most people are aware that they'll have to pay a down payment, make monthly mortgage payments and pay property taxes. But many may be surprised to learn that before the sale is through there's an extra few thousand dollars they'll have to shell out, above and beyond the sales price, which comes in the form of fees called closing costs.
According to Byron Limbrick, a real estate broker at Real Living, closing costs are incurred by both the buyer and the seller, and they are typically 3 to 5 percent of the purchase price of their property. That means for a home priced at $200,000, closing costs could be between $6,000 and $10,000.
Limbrick says closing costs can vary based on the purchase price of the property, at what point of the month the home is closing and the amount of taxes needing to be paid. Closing costs also vary from state to state. Limbrick says that in the state of Washington, typical closing costs for the seller include excise tax, title fees and escrow fees, and for the buyer they include title fees, escrow fees, appraisal, credit report fee, flood certification, recording fee and lender fee.
"Both parties will incur closing costs, but in some cases, the buyer can ask the seller to pay the closing costs or contribute a certain percentage or dollar amount towards the buyer's closing costs," Limbrick says.
He adds that in most cases, the amount one must pay depends on what kind of market it is -- selling or buying.
"In the state of Washington, as a seller, (paying closing costs) is the cost of doing business," Limbrick says. "As a buyer, you can negotiate with the seller to have your closing costs paid."
Jennifer Barnes, branch manager and escrow officer at Pickford Escrow Co., says closing costs vary depending on the purchase price, loan amounts and what items are agreed upon between the buyer and the seller on the purchase contract. There are also two kinds of closing costs -- recurring and nonrecurring. To better understand the two, Pickford Escrow Co. has an information sheet to help buyers and sellers.
Recurring costs, which the party pays at closing, will continue to occur after the escrow closes as a cost of maintaining the property. These include interest on the new loan, real property taxes, homeowners association dues and fire insurance premiums.
Nonrecurring costs are charged one time only as an expense of closing the transaction. They include escrow, notary, messenger and title fees, real estate broker commissions, fees for property disclosures or city reports, and lender's costs such as appraisal, credit report, loan processing and document fees.
Limbrick says that buyers can apply for a loan with no upfront closing costs to be paid by the seller, but it could possibly cost them more on the back end.
According to an article on the real estate website Zillow, a buyer can avoid upfront closing costs by getting a no-closing cost mortgage, in which they don't pay any of the closing costs when they close on the mortgage. When a lender offers a deal such as this, though, typically, it ends up costing the buyer in the long run. For instance, the lender may charge them a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing costs into the total mortgage owed, in which case the buyer ends up paying interest on the closing costs.
Grants to help with closing costs are also available for first-time homebuyers. According to an article on the Home Guides section of the San Francisco Chronicle, the Department of Housing and Urban Development provides a list of programs state buyers can apply for when buying a new home. One such program, the California Homebuyer's Downpayment Assistance Program, offers eligible homebuyers up to 3 percent of the sales price toward closing costs or a down payment. Buyers can also apply for grants through an approved lender. The California Housing Finance Agency, for example, provides borrowers with a list of CalHFA preferred loan officers and a search engine to find approved lenders by city or county.
Limbrick says closing costs often come as a surprise to most, if not all, first-time homebuyers, but once they've been through it, things change.
"People who have previously purchased or sold homes become familiar with closing costs very quickly," he says.