While the buyer usually pays for the home in a real estate deal, it doesn’t mean the seller is free from any expenses. Do not overlook closing costs amidst the excitement about the potential earnings from your sale. These are the fees necessary to finalize the sale and transfer of the property. The precise amount of these costs can differ based on the state and individual transaction. In this context, we’ll thoroughly examine the usual closing costs that homeowners selling their property should expect.
Title Insurance for Property Owner
Title insurance safeguards the new proprietor from potential problems with the title of your home. This means that the new owner is protected if there’s any dispute over the property or any lingering liens from contractors, debt collectors, or the government that could offer someone else a claim to ownership.
With a one-time payment, this insurance shields the future owner from the financial stress of resolving title disputes in court, regardless of whether these issues crop up at the closing or years later. It even protects their investment in the house if they have to relinquish their stake in the property under worst-case scenarios.
Typically, buyers request sellers to bear this cost, which can fluctuate between $1,000 and $4,000. If you’ve owned your home for less than a decade, inquire about a reissue rate. Given that the policy covers a shorter duration of your home ownership, the rate for the policy is reduced.
Understand that on the day of closing, you’ll likely notice two distinct line items related to title insurance in your closing documents. One pertains to the owner’s title insurance discussed above. The other relates to the lender’s title insurance, a similar policy that safeguards the lender’s interest in the property from the new buyer’s perspective, and the buyer typically covers it.
Escrow Fees
An escrow account, managed by a third-party custodian, protects both buyer and seller by preventing either party from absconding with the other’s funds. This account can be perceived as a savings account designed to secure an earnest money deposit.
The costs associated with escrow encompass the endorsement and documentation of closing papers and the deed and the retention of all acquisition funds. Additional fees may be applicable for fund transfers, document duplication, and notary services. Typically, the expenses incurred in escrow range from $500 to $2,000. This approximates 1% to 2% of the home’s selling price. These escrow fees are customarily divided equally between you and the buyer.
Property Taxes
As a property owner, you must pay property taxes, which can fluctuate significantly from one state to another. These taxes are typically prepaid through an escrow account tied to your mortgage. If you decide to sell your property, you must cover the portion of property taxes accumulated until the closing date. After the closing date, the buyer or new owner assumes this responsibility. It’s crucial to anticipate that you must settle any outstanding capital gains tax Nebraska at closing to ensure all dues are current.
Costs Associated with Settling a Loan
Typically, homeowners selling their properties aim to set a sales price that would cover their mortgage and fulfill their lenders’ conditions. It’s common for your mortgage payoff balance to be slightly higher than the remaining amount on your mortgage, and it could even surpass the buyer’s proposed price. This happens due to the prorated interest charged by lenders on the mortgage.
There might be instances when your lender imposes a prepayment penalty if you decide to clear your mortgage loan before its term ends. If a home equity loan or line of credit is linked with your mortgage, the lender demands this amount to be completely paid during settlement as part of the seller’s closing costs. Discuss with your lender what will be necessary to fully pay off the mortgage, so you can clearly understand the closing costs.
Mortgage Payoff
If you have a mortgage, settling the mortgage is required when you decide to sell the property. Instead of receiving all the profit and settling the debt with the mortgage company, paying off your mortgage when concluding the sale is necessary.
Several mortgage lenders impose a prepayment penalty, a monetary fine for early mortgage repayment. If you sell your property and hence repay the mortgage before its due date, you’ll usually be expected to cover this prepayment penalty as well.
You can estimate this mortgage payoff by examining your current mortgage balance; but for an accurate figure, you’ll need to communicate directly with your lender. Since the interest on the mortgage accrues daily, the final settlement date will influence the total amount due on the mortgage.
HOA Transfer Fees
If your residence is in a neighborhood managed by a homeowners association (HOA), you might encounter HOA transfer fees, in addition to the closing costs mentioned earlier. These are customary charges that arise when property ownership changes hands.
Transfer fees are designed to cover expenses related to document preparation, sharing HOA regulations with the new owner, managing property inspection records, updating homeowner databases, altering security codes, producing new security cards, and other administrative tasks. Besides transfer fees, you may also need to settle some payments at closing to ensure everything is paid up to the closure date, similar to property taxes.
Seller Concessions
In a market that favors buyers, or to facilitate the completion of a deal, you may agree to shoulder some of the closing costs. This is known as a seller concession, contribution, or credit, these terms are interchangeable. It’s common for sellers to agree to bear the cost of necessary repairs discovered during the home inspection as a form of seller concession.
If your buyer isn’t making a cash purchase, the total amount of seller concessions might be restricted by the kind of home loan they’re obtaining. For a conventional loan on a single-family home intended as a primary residence, the caps on seller concessions range from 3% to 9%.
This depends on the buyer’s down payment size and whether they receive closing cost assistance from other sources. Home loans backed by government agencies, such as the Federal Housing Administration, have their own set limits on seller concessions.
Costs Associated with State-endorsed Loans
You might need to bear some fees at the closing stage for certain government-aided loans like FHA, VA, and USDA loans. FHA loans, supported by the Federal Housing Administration, necessitate an upfront payment of a mortgage insurance premium (MIP) that amounts to 1.75%, besides a monthly charge. VA loans, supported by the U.S. Department of Veterans Affairs, require an initial VA funding fee from home buyers. The exact amount varies based on the loan amount and the buyer’s service history. Similarly, when it comes to USDA loans, borrowers must also pay an upfront guarantee fee.
Endnote
Closing costs can be unexpectedly high, underlining the importance of incorporating them into your financial plan. While there might be ways to lessen these costs or incorporate them into your mortgage loan, saving sufficient funds to cover them is generally advisable.
