What Are Closing Costs? Here's What Home Buyers Should Know

Find out what closing costs are and how to use that information to make more informed decisions in your home buying process.

Aug 9, 2014 at 8:12PM

For Sale Signs Andy Beecroft
Credit: Andy Beecroft via geograph.org.uk.

What are closing costs? Are they part of your down payment? Who gets the money? Who pays it -- the buyer or the seller?

These are all questions you might be asking if you're starting to look for a home. Considering that closing costs can be as much as 2% to 5% of the purchase price, it's pretty important to go into the home buying process armed with as much actionable information as possible. Let's take a look at what closing costs are and what you can do to minimize them if you're a home buyer.

What are closing costs?

Stack

Closing costs are usually paid up front and in addition to the down payment.

In short, closing costs are the fees paid at the closing of a real estate transaction that cover the costs of services provided to the buyer and seller both. This could include any of the following:

  • Appraisals
  • Property and pest inspections
  • Attorney's fees
  • Prepaid insurance premiums

These are just a few examples, and the expenses can differ from state to state and transaction to transaction. For example, in my home state of California, real estate transactions are typically processed by an escrow company, while in my former home of Massachusetts, a real estate attorney often handles the closing process.

Have a conversation with your real estate professional early in the process to determine what sorts of closing costs you can expect based on the properties you will be considering and what expenses the buyer and the seller will be responsible for, respectively. It's also best if you plan to pay many (or even all) of your closing costs out of pocket, rather than trying to bundle them into your loan or reducing the amount of cash you will put toward your down payment because you hadn't planned for these additional expenses.

Using closing costs as leverage

Buyers and sellers can both use closing costs as a negotiating tool. Sellers may offer to rebate a buyer the cost of an inspection or to cover attorney's fees in lieu of a cash discount. Similarly, the buyer might be able to get a seller to cover part or all of the closing costs that are the buyer's responsibility. The point? Using closing costs as a negotiating tool may help you get a slightly better deal and save out-of-pocket costs at the same time. Just don't be let down if the seller refuses; instead focus on the total price you're getting and not the individual parts. 

A good rule of thumb is to consider how you would respond to a request if you were on the other end of the transaction, looking to find an amenable deal for both parties. Don't try to "win" so much as try to reach a deal that works for both you and the seller. There's nothing wrong with asking service providers like home inspectors or attorneys for a discount as well. 

Keep your eye on the big picture

Sold Sign Pd

Often, a house is the single largest purchase people make in their lives. But as with any other investment, you can't get too caught up in the short term and lose track of your goals. Closing costs are just part of the equation, and they often pay for the services of the people who make home ownership a reality. Take advantage of the services they provide and their expertise. Get your money's worth.

Most importantly, go into your purchase fully aware of the costs and be prepared to pay them. If you find the perfect property for you, you need to be ready and willing to pay those closing costs. Your real estate and mortgage professionals can be a wealth of information about the specific costs in your area. Use their knowledge to go into your search fully prepared and with the necessary cash on hand.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers