Are you buying or selling a home in the near future? If so, then you need an accurate appraisal of the costs you would incur. And yes, contrary to popular belief, selling a home can be costly as well. And, while doing the calculations, you must include the closing costs. Many new home buyers or sellers ignore these costs and are surprised when the expenses exceed their expectations.
To understand closing costs, you need to get a better idea of what they are, the rationale behind them, and some of the major components that add to the closing cost. Let’s begin with a proper definition.

What are closing costs?

To fully understand closing costs, you need to know what a ‘closing’ is. It is the final step in any real estate deal, the time when the title of the property is transferred from the seller to the buyer. It is the time when you gain the ownership of a new house when buying or lose the ownership of the said house when selling. So now you know what closing is. This therefore implies that closing costs include the money you have to pay during closing.
The closing costs may be simply defined as the fees that you pay when you close a real estate transaction. You need to pay these costs, irrespective of whether you are buying or selling. But how much are they? What would you have to pay to close a deal? That depends. On average, the closing costs are around two to five percent of the price of the property. Although that doesn’t sound very costly, it can be a lot, as houses are quite expensive.
For instance, if you are buying or selling a house worth around $150,000, the closing costs may range somewhere between $3,000 and $7,500. Remember that this cost is over and above the price of the transaction. So the strain it may put on your budget can be considerable.

Kinds of closing costs

Although classifying all the different components of closing costs may seem next to impossible, a helpful way to classify them would be dividing them into two categories:
• Non-recurring costs
• Prepaid costs

Non-recurring costs are one-time costs incurred while obtaining a loan or buying property. Prepaid costs, on the other hand, recur over a long period of time. Some examples of prepaid costs include homeowners’ insurance and property taxes.
Components of closing costs

Now that you understand what closing costs are and their different kinds, it’s time to examine the components that add up to create the closing costs. There is no definitive list of these components since the costs you will pay depend upon the nature of the situation. However, there are some common costs that, more or less, everybody needs to pay. Some of these are as follows:

Brokerage Commission

This is one of the key (and usually the most expensive) component of the closing costs if you are selling your home. It’s the commission you offer to the broker or the real estate agent for their assistance in finding a buyer, marketing your property, and conducting negotiations. The commission is calculated as a percentage of the total sales price and is usually determined and agreed-upon beforehand.

Homeowners’ Insurance

If you are buying a property and you want to protect it against damage from theft, fire, or other damages, you need to pay a homeowners’ insurance in advance. It is a pre-paid cost which the loan providers usually require while approving the loan application. Protection from natural disasters such as flood or earthquake may be included in the homeowners’ insurance, although a separate policy may be required.

Property Taxes

As the title suggests, property taxes are the annual taxes on the property that are payable at a specific date each year. These taxes are paid by either the buyer or the seller or both of them combined. Real estate transactions usually include property taxes which can then be paid by both the buyers and sellers. The percentage of tax you end up paying in the closing costs, depend upon the time of the year for which you owned the property. For instance, if you’re selling the property in the sixth month of the year, you should pay 50 percent of the annual property tax.

Attorney Fees

Buying or selling property is a complicated legal procedure that usually requires the involvement of attorneys on both sides. Therefore, it’s useful to include an estimate of the attorney fees while calculating the closing costs.
Mortgage Application Fees

While applying for the mortgage when you are buying property, you need to pay an application fee to the lender. This is usually paid before closing the deal and must be included in your estimates.

Recording Cost

Either the buyer or the seller needs to pay the recording cost to the government. This is the price paid for a change, in the official government records, regarding the ownership of the property. Governmental entities usually require the buyers or sellers to pay the recording cost at the time of the transaction.

Appraisal Fees

Before buying the property, you need to acquire the services of professional appraisers. Their job is to make an accurate assessment of the property’s value. It helps you in determining whether or not you are paying a fair price for the property. Sellers may opt for an appraisal as well. Many lenders make the provisions of the loan conditional to the appraisal of the property. So you may have no other choice. The appraisal fee is usually paid in exchange for the appraiser’s services.
Inspection Fees

In addition to the appraisal, another service that you may require before buying is home inspection. During an inspection, independent experts verify whether or not the property is in good condition. Home inspection may also include pest inspections or termite inspections. Loan providers may require home inspections, before the grant of the loan, to gain assurance of the value of the property.

Now you know all about closing costs and what they entitle.