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Closing is one of the most exciting parts of a home sale. The search is over, you’re excited to make your new house feel like home, and this is the last step. Closing refers to the part of a home sale when the ownership of the property changes hands, transferring the title of the home from the seller to the buyer.
As much as it can be an exciting time, closing can also be confusing or even intimidating. Getting everything in order involves a lot of paperwork and fees. It’s common for total closing costs, including title insurance and various fees associated with the purchase of a property, to add up to thousands of dollars.
It can be helpful to get clear on who typically pays for which closing costs early on in the home-buying process, so you’re prepared to cover your portion from the start.
If you’re feeling anxious about how to pay for closing costs on a house, you may be wondering if any items on the long list of fees are optional.
The cost of title insurance is typically part of overall closing costs. There are two types of title insurance policy: lender’s title insurance and owner’s title insurance. The lender’s policy protects the lender who issues the mortgage or other financing loan. The owner’s policy protects the new homeowner against any claims or title defects that may be discovered after they purchase their home.
Lender’s title insurance is typically required. If you’re getting a mortgage to buy your home, you’re likely locked into buying a lender’s title insurance policy because your bank wants to ensure it’ll get its money back.
The owner’s title insurance policy is optional, but it’s still generally a wise purchase. Title insurance protects a homeowner against potential issues that may only be discovered after closing on the home. Liens, relatives of former owners who claim to have legal interest in the property, encumbrances or other issues could be costly—or even threaten your claim to your home. An owner’s title insurance policy generally costs somewhere from a few hundred dollars to $2,000 as a one-time premium charge, and the protection lasts for as long as you (and often your heirs) own the property.
Another point in favor of getting an owner’s title insurance policy is that often, the seller ultimately covers the cost. In many (although not all) standard agreements, the buyer’s escrow funds initially cover both the lender’s and owner’s policies, and the seller’s final settlement agreement includes covering the cost of the owner’s policy. Why does the seller buy title insurance for the owner? Here are a few possible reasons:
Who pays for the owner’s title insurance policy can depend a lot on local customs in your state (or even the region in your state) and the current housing market, so having the seller cover this cost isn’t guaranteed, but it happens more often than you might think.
Closing costs can make up about 2‒5 percent of the value of the home, so a $500,000 home could cost $10,000‒$25,000 in closing costs. A home purchase often involves many more parties than the buyer and seller. Real estate agents, lenders, attorneys, inspectors, title insurance companies and others play a part in helping the sale go through smoothly.
Here’s what’s commonly included in closing costs:
The buyer usually pays most of these closing costs. Sometimes it’s possible to ask the seller to cover part of the costs (either as a percentage or a set dollar amount), but sellers are already responsible for a number of costs on their end, such as agent commissions, prorated property taxes, HOA fees and other expenses. Whether they’ll agree to take on some closing costs may come down to factors such as whether buyers or sellers have more leverage in your current housing market.
Escrow fees are often split evenly between the buyer and seller, although this may also be possible to negotiate depending on your circumstances.
Most closing costs and fees aren’t optional, but that doesn’t mean there’s no room to lower costs. Here are some ways you could try to edge down your upfront payment.
If you’re in the market for a house, set aside some savings to put toward closing costs and title insurance. You can list which fees you’ll probably need to cover and estimate the cost range for your share. The more prepared you feel, the more smoothly you can navigate the closing process and have an easier move into a new home.
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