Closing Costs Explained

Closing refers to the final step in buying/selling a home: settling all costs, paying them out, and finally transferring ownership on the closing day. For the average buyer or seller, closing can feel like a bit of a mystery, especially in Washington where documents are often signed remotely and over a period of time leading up to the closing day, rather than all parties meeting together in person and finalizing the transaction. We wanted to provide clarity on what costs you can expect to encounter at the average closing, either as a buyer or a seller, and explain what these costs are.

Keep in mind this post covers what you can expect in an average transaction; technically, anything can be negotiated in a contract, so a cost that a buyer traditionally pays may be taken on by the seller for whatever reason the parties agree to in their contract.

Without an exact purchase price, it is difficult to give more than a rough estimate on what the exact closing costs will be for each party, but a general rule is that sellers should plan to spend 8-10% of the purchase price at closing, and buyers 2-5%. Sellers do pay more at closing, but it’s important to note that these costs are often paid for out of the gain of the home sale, whereas buyers need to be prepared with cash set aside.

Below, you will find a table that itemizes all typical closing fees, their likely cost and who normally pays for what. Each item is defined in order below the table.

Definitions:

1. Home appraisal: lender requires a licenced appraiser to assess the home’s fair market value. Buyer is responsible to pay for this service
2. Mortgage origination fee: lender charges a fee to give the buyer a loan; this is a one-time fee the buyer has to pay
3. Mortgage discount points: buyer has the option to pay discount points, or prepaid interest, on their loan to lower their interest rate.
4. Prepaid home insurance: the seller may have already paid their home insurance for the entire year, even for time when they will no longer live there. This amount is prorated at closing and the buyer pays the share for the time they will live there.
5. Credit report fee: your lender will run a hard look into your credit, likely when you get pre-approved and/or underwritten. This simply checks your credit history to see how you’ve handled debt payments.
6. Recording fees: required fee by government to have all documents recorded in new buyer’s name
7. Lender’s title insurance: protects the lender in case issues are discovered in the home’s title (such as someone with a legal claim to the home from the past)
8. Escrow fees: traditionally, both parties split this fee because it pays the escrow company who handles all the closing documents and money for both the buyer and the seller
9. Real estate commission: traditionally, sellers decide on a set percentage of real estate commission to offer, and that typically gets split between the listing and buyers agent. For example, the seller agrees to offer 6% commission. 3% will go to their broker, and the other 3% is offered to whatever agent can bring a buyer to the home. Sellers technically aren’t required to offer a commission to the buying agent, but if they don’t agents legally do not have to show their home to buyers. It’s very rare for sellers to offer no buyer commission, but when this is the case, the buyer will be responsible for paying their agent an agreed upon amount.
10. Owner’s title insurance: protects the homeowner in case someone sues and claims to have ownership to the home
11. Property taxes: the seller is responsible to pay property taxes up until the day of closing, even if they’re not due until after closing.
12. Prorated HOA dues: if the home/condo has an HOA, the seller will need to pay these up until the day of closing, even if they’re not due until after closing.