Closing Costs

Closing costs in real estate are the various fees and expenses that buyers and sellers must pay to finalize the purchase or sale of a property, separate from the property’s purchase price. For buyers, these costs typically range from about 2% to 5% of the purchase price, though they may be higher or lower depending on the specific transaction, location, and negotiated terms. Sellers generally face higher closing costs—often around 8% to 10% of the sale price—due largely to real estate agent commissions and transfer taxes.

Components of Closing Costs

• Loan-related fees: origination fees, points (loan discount fees to reduce interest rate), underwriting fees, appraisal fees, credit report charges, and mortgage insurance premiums if applicable. These mostly apply to buyers financing with a mortgage.
• Title services and insurance: fees for conducting a title search, title insurance to protect buyer and lender from disputes over property ownership, and settlement or closing fees handled by the title company or attorney.
• Government taxes and fees: transfer taxes (such as land transfer tax in Canada), recording fees, and other local or state-required costs.
• Prepaid expenses: upfront payments for property taxes, homeowners insurance, and sometimes escrow deposits for future bills.
• Third-party fees: home inspections, surveys, attorney fees, and sometimes survey or certification costs.

Examples in Real-World Application

1. U.S. Buyer Example: A buyer purchasing a $300,000 home might expect closing costs between $6,000 and $15,000 (2–5% of price). This could include lender fees, title insurance, appraisal, escrow fees, taxes, and home inspection fees. Buyers usually pay loan fees and prepaid expenses, while sellers often cover agent commissions and transfer taxes, sometimes negotiated.
2. Seller Closing Costs: Sellers generally face higher closing costs—often around 8% to 10% of the sale price—due to real estate agent commissions, transfer taxes, legal fees, and possible mortgage discharge penalties. However, seller costs are deducted from sale proceeds, so sellers rarely pay out of pocket at closing.
3. Canadian Buyer Example: A first-time buyer in Toronto purchasing a $700,000 condo might pay approximately $17,500 in closing costs, including legal fees, land transfer tax, title insurance, and other adjustments. Closing costs in Canada typically range from 1.5% to 4% of the purchase price and vary by province.

Why Closing Costs Matter

• They are essential for budgeting because they represent a significant additional cost beyond the down payment and purchase price.
• Understanding closing costs prevents financial surprises at the closing table and helps buyers and sellers plan their finances smoothly.
• Some closing costs can be negotiated or shopped around, especially lender fees and certain third-party services.
• In some cases, buyers can roll closing costs into their loan, financing these expenses over the life of the mortgage, though that increases total interest paid.

Summary Table of Typical Closing Cost Expenses