When buying or selling a property or business, closing costs are among the most important things to plan for. These expenses are included in the agreed-upon price and cover fees for lenders, attorneys, taxes, and other services. Buyers and sellers handle these costs, so understanding them prevents surprises.

Let’s examine closing costs, who pays for them, and how to manage them effectively.

What Are Closing Costs?

Closing costs are fees required to finalize a real estate or business transaction. They occur when the property title transfers from the seller to the buyer. Typical closing costs include loan fees, title insurance, appraisal, and taxes.

Lenders must legally disclose these costs to buyers at least three business days before the closing date. This document, called a Closing Disclosure, lists every fee you must pay.

Key Components of Closing Costs

For Buyers:

• Loan Origination Fees: This fee covers the lender’s work to process your mortgage. It’s often 1% of the loan amount.
• Appraisal Fees: Lenders require an appraisal to confirm the property’s value. This fee ranges from $300–$600.
• Title Insurance: Protects the buyer if ownership issues arise later. It usually costs 0.5%–1% of the home price.
• Escrow Deposits: Buyers prepay a few months of property taxes and homeowners insurance at the lender’s request.

For Sellers:

• Realtor Commissions: Sellers typically pay 5%–6% of the property’s sale price to cover agent fees.
• Transfer Taxes: These taxes vary by state and help cover the cost of transferring the title.
• Attorney and Brokerage Fees cover legal and broker assistance during the sale.

Factors That Affect Closing Costs

Several factors can influence how much you’ll pay in closing costs:

• Property Location: Taxes and fees vary widely by state and county.
• Loan Type: Conventional, FHA, and VA loans have unique fee structures.
• Negotiation: Buyers and sellers can often negotiate who pays for specific costs.

For example, buyers may request that sellers cover some costs as part of the deal, especially in a buyer’s market.

Typical Closing Costs by Percentage

On average, closing costs range between 3%–6% of the total loan amount. For a $300,000 home, you’d pay between $9,000 and $18,000 at closing. According to a ClosingCorp report, the nationwide average for closing costs in 2021 was $6,905, including transfer taxes.

Who Pays Closing Costs?

Buyers Pay:

• Most fees are related to the loan process.
• Escrow deposits and prepaid insurance.
• Appraisal, survey, and inspection costs.

Sellers Pay:

• Real estate commissions (typically split between the buyer’s and seller’s agents).
• Transfer taxes.
• Costs to clear liens or settle title issues.

However, buyers and sellers negotiate to split some of these costs in many transactions. Sellers may agree to concessions, especially if they’re motivated to close quickly.

How to Reduce Closing Costs

Closing costs can feel overwhelming, but there are ways to reduce expenses.

For Buyers:

• Compare Lenders: Different lenders have different fees. Shopping around saves you hundreds or even thousands of dollars.
• Work with the Seller: In a buyer’s market, request the seller to cover some costs in the deal.
• Close at the End of the Month: This reduces the number of prepaid interest days required before your first mortgage payment.

For Sellers:

• Understand Your Fees: Review contracts carefully to avoid unnecessary charges.
• Plan for Taxes and Liens: Settle all outstanding financial obligations before closing.

Special Types of Mortgages and Closing Costs

• FHA Loans: Buyers pay 1.75% of the loan amount as an upfront mortgage insurance premium (MIP).
• VA Loans: Buyers pay up to 3.3% as a funding fee, but eligible veterans can waive this fee.
• No-Closing-Cost Mortgages: These eliminate upfront fees but often have higher interest rates.

Common Closing Cost Pitfalls

Closing costs can change between the estimate and closing day, so stay alert. If any fees seem excessive or unclear, ask your lender for clarification. Watch out for unexpected costs like:

• Overpriced documentation or processing fees.
• Unnecessary third-party services.
• Errors in the Closing Disclosure.

Being proactive can save you money and frustration.

Closing Costs in Business Sales

If you’re buying or selling a business, the process involves unique closing costs:

• For Buyers: Expect to pay attorney fees, loan processing costs, and appraisal fees.
• For Sellers: Plan for broker commissions, transfer taxes, and possible prepayment penalties on outstanding loans.

Both parties should review the terms of the agreement to understand their financial responsibilities.

Final Thoughts

Closing costs are an essential part of any real estate or business transaction. Knowing what to expect and planning can save you time, stress, and money. Whether you’re buying your first home or selling a business, make sure to ask questions and review all documents carefully. Experienced professionals, like a trusted lender and real estate agent, help make the process smoother.

By understanding and managing closing costs, you’ll be better prepared to finalize your transaction and confidently move forward.