Closing expenses are the costs of buying a property excluding the price of the property itself. Some costs are paid for by the buyer, and some are paid by the seller. Some of these costs are distributed differently, based on local custom. Most closing costs are negotiable between buyer and seller in the purchase agreement.
Common Seller Costs
The biggest closing expense to a seller is usually the real estate commission. Rates vary and are negotiable between seller and real estate broker. They often range from 4 to 6 percent of the sales price. In some states, such as New York, closings must be handled by an attorney. Both buyer and seller are separately represented, at their own cost. The seller generally pays for that portion of the annual property tax prorated to reflect the number of days he owned the house during the year of the sale.
Common Buyer Costs
The biggest closing expense for a buyer is usually the down payment. Many loans require as much as 20 percent of the property price as a down payment. The buyer also pays loan costs, which are the costs associated with getting a mortgage. These can include points, which are payments to obtain a lower interest rate on the mortgage. One point is equal to 1 percent of the loan amount, and each point purchased lowers the loan interest rate by about one-quarter of 1 percent. Other loan fees include an application fee, a documents fee and a loan origination fee. Lenders may have different names for the many loan fees they charge. The buyer also usually pays for an appraisal of the property, so the mortgage lender can verify its loan is secured by a property that exceeds the loan amount. The buyer also pays for homeowner's insurance, and he may have to pay for mortgage insurance if required by the lender.
Costs Commonly Determined by Local Custom
Several common closing expenses may be paid by either buyer or seller or split, according to local custom. One of these expenses is title insurance, which is usually purchased in separate policies by the buyer and seller. Transfer tax or fees, which are required in some places by state and/or local government agencies when a property changes hands, are another.
Average closing costs for a seller hovered around $3,700 in 2010 for a $200,000 house with a 20 percent down payment, according to a Bankrate study. The costs varied quite a bit from state to state, with New York's closing costs averaging over $5,500 and Arkansas's at $3,000. Seller closing costs, because they are dominated by the real estate commission, depend on the commission rate and sales price.