What Are Closing Costs?

What Are Closing Costs in Real Estate?

Selling your home can be a complex process. Even in a hot market, sellers may have to make concessions in order to close the sale.

Closing costs include fees for services related to applying for a mortgage and finalizing the real estate transaction. These fees can be negotiable or non-negotiable depending on the type of property and the lender.

Taxes

Whether you’re buying an all-cash co-op or financing a new construction project in NYC, closing fees can add up to more than 5% of your purchase price. Fortunately, many of these fees are negotiable. But there are some that you’ll be obligated to pay no matter what, including property-related taxes and fees and mortgage-related costs.

These include transfer taxes, which are levied by your local government to cover the cost of updating the real estate records and transferring ownership to you. These vary widely by region, but typically run $150 - $400 per home. You may also have to pay for a title search, which includes an examination of historical documents related to the property to ensure that it is free of any ownership disputes, unpaid taxes, liens, judgments, and more. Depending on your loan type, you’ll probably also need to pay for underwriting fees, which go to the lender to verify all of the details of your loan paperwork.

Another fee that often sneaks up on buyers is the mortgage recording tax, which is typically about 1.5% of the purchase price of your new home. You can learn more about this fee in our dedicated mortgage recording tax post. Buyers who are purchasing a co-op will be exempt from this fee because they’re buying shares in a building rather than a real property with a deed.

Finally, you’ll likely have to pay for your pro-rata share of current real estate taxes on the property you’re purchasing and any attorney fees associated with the closing. These will vary by state, but they are typically based on the sale price of the property and the amount of time the seller has owned it.

Generally, these expenses can be negotiated between you and the seller, although this will depend heavily on the market. For example, in a hot market where supply is limited and bidding wars are common, sellers may be more willing to pick up some or all of these costs. However, in a slower market, they might not have as much incentive to do so.

Mortgage Points

Mortgage points are a form of prepaid interest you can buy upfront to lower your mortgage's interest rate and monthly payments. Each point costs 1% of your loan amount. You can find the cost of mortgage points on your lender's closing disclosure. Mortgage points are usually tax deductible since they're considered prepaid mortgage interest.

There are two types of mortgage points: origination points and discount points. Origination points pay the lender for its work originating your loan. These fees are usually nonrefundable and can run up to $500. You can avoid paying these fees by choosing a mortgage company that doesn't charge them. Buying mortgage points is an option that makes sense when you plan to live in your home for years. The upfront cost will be offset by the savings you'll get from a lower mortgage rate and monthly payments.

Unlike origination points, mortgage discount points directly reduce your mortgage's interest rate. One point costs 1% of your loan amount, so it can add up to thousands of dollars in closing costs. You can also save money by making a larger down payment instead of purchasing mortgage points.

Before you decide to purchase points, talk with your lender about the benefits and costs of this option. They can help you calculate your breakeven period, which is how long it will take to recoup the expense of buying mortgage points by saving on interest over the life of your mortgage.

Another fee that can significantly increase your closing costs is mortgage recording tax. This is a state tax that must be paid when you buy a new home. It's typically about 0.5% of the mortgage amount and can be included in your closing costs or added to your loan balance.

The other surprising buyer closing costs include PMI, which is insurance that protects your mortgage lender if you default on the loan. You can avoid this fee by choosing a lender with a low mortgage interest rate or by paying up front for private mortgage insurance (PMI).

Some buyers can negotiate with the seller to cover some of their closing costs. This is especially common when it's a buyer's market and the seller wants to sell quickly. However, it's important to only ask for enough concessions to make the deal happen without damaging your credit score.

Closing Costs for Buyers

The home buying process can be complex and confusing, especially in New York City where closing costs add up quickly. There are various fees and taxes that both buyers and sellers must pay, some of which are mandatory and others that are negotiable. While the specifics vary by state and city, buyers can generally expect to cover Realtor commissions and other mortgage fees.

Buyers can also expect to pay for loan recording fees, attorney fees and an appraisal fee. Additionally, some lenders require that borrowers take out title insurance to protect against any claims on the property. These additional costs can run anywhere from $300 - $800.

As for real estate fees, the biggest one will be the realtor commission, which typically amounts to 6% of the sales price and is split between the buyer's and seller's agents. Other real estate agent fees may include a flat fee to transfer the property, as well as administrative and escrow fees. Finally, a mortgage recording tax is charged by the state to record the mortgage and is typically around $2,000.

In addition to these standard fees, there are a number of other specific costs that can come up during the closing process. These include a common charge adjustment fee, a NYS equalization fee, residential deed transfer fee and co-op stock transfer fee, among others.

Whether or not these fees are charged depends on the type of loan you get and the type of property you buy. Additionally, if you are buying a new condo from a developer, the sponsor may offer a closing credit instead of lowering the purchase price of the unit.

While it is possible for both parties to pay some or all closing costs, New York sellers are obligated to cover the majority of them. As such, if you are a New York buyer looking to buy a condo and avoid paying most or all of the closing costs, consider working with a brokerage like Prevu that offers a full-service model. These brokers will handle everything from advising on the right purchase price to assembling the board package required to prove your worth to a condo or co-op board.

Closing Costs for Sellers

As you might expect, buyers and sellers accrue some closing costs in the process of buying and selling homes. However, these fees are different for each party and each city and state has its own specific expenses. When it comes to New York City real estate, the biggest seller-side closing cost is a Realtor commission. Fortunately, it is easy to reduce this expense by working with a brokerage that rebates part of their commission to buyers.

The other major seller closing costs are NYC and state transfer taxes as well as co-op flip taxes and a common charge by many buildings to cover their administrative and maintenance fees. These charges can add up to more than 2% of the total sale price of an average NYC apartment.

Another fee is the hazard insurance premium that covers the property for natural disasters. This is an upfront fee that can be paid at closing or rolled into the mortgage. Finally, title insurance and recording fees are a few other small closing costs that can be incurred by sellers and buyers alike.

Closing costs can be quite expensive for both buyers and sellers, which is why it’s important to understand them in advance and plan accordingly. However, there are ways to mitigate these costs by taking advantage of incentives offered by lenders and working with a Realtor that is willing to negotiate on behalf of their clients.

New York City has the highest closing costs in the country according to a 2021 report by ClosingCorp, which researches residential real estate. This is due in large part to high sales tax rates as well as a relatively high down payment requirement on home loans.

If you’re looking to buy a New York City home or apartment, you can use this calculator from Prevu to determine your estimated closing costs and see how much money you may be able to save with a lender credit or broker rebate. You can also speak with a knowledgeable Prevu agent who can help you navigate the closing process and make sure your interests are protected at every step.