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Knowing how much closing costs amount to is a big factor in calculating total home-purchase costs - and in factoring in just how much house buyers can afford.

Home buyers (and sellers, too) unfamiliar with closing costs should know that closing costs are pricier than they may have expected. That makes knowing the number on closing costs on a new home even more critical before the buyer and seller sign off on possibly the biggest financial transaction of his or her life.

What Are Closing Costs?

Closing costs represent the sum of all the fees, charges and related expenses with the closing (also known as the "settlement date") of a new property purchase.

Closing costs are usually divided between the buyer and the seller, although negotiations between buyer and seller can tip the scales in either direction, and could impact the total sale price in the process.

Normally, the buyer will be provided a total mortgage loan estimate by the mortgage lender when applying for a home loan. While that estimate is dependent again on the loan contract, and the state or locality where the purchase will occur, pay special attention to the closing disclosure form. This form should lay out the exact financial terms of the mortgage loan, including the property's closing costs.

Also, about three days before the home settlement date, the mortgage lender will provide the buyer a closing disclosure statement, which will, once and for all, establish specific closing costs.

Buyers are advised to compare the loan estimate form and the closing disclosure statement to see how closing costs match up. Any price discrepancies should be addressed and cleaned up before the property changes hands.

Closing Costs for Property Buyers

While closing costs vary depending on the total amount of the property transaction, and which state you make the home purchase, they normally range between 2% and 5% of the total property sales price. In other words, if you purchase a home for $300,000, you can expect to pay between $6,000 and $15,000 in total closing costs.

Typically, the lender breaks down those costs in the following categories:

Mortgage loan origination fees. The buyer's mortgage lender issues this expense to process the mortgage loan application.

Home inspection fee. The home buyer also bears the burden of paying for the property's inspection, which is paid out to a professional home inspector.

Home appraisal fees. This is the fee issued by the home appraiser to assess the home's value.

Title search fees. This fee, which can be charged to either the buyer or seller depending on how the property transaction is structured, is assessed for critical paperwork involved in the home title-search process.

Attorney fee. This closing cost fee covers the cost of legal paperwork completed by an attorney to close the home purchase process.

Home property insurance fee. This closing cost fee is payable to the buyer to cover property insurance costs.

Points. This closing cost is charged to the buyer, by the lender, to lower the total interest rate on the mortgage loan. A one-point closing cost figure represents 1% of the total mortgage loan amount.

Credit agency reporting fees. Credit checks are conducted to weigh the buyer's credit health, and costs associated with those credit checks are passed on to the buyer.

Escrow fees. Buyers are charged escrow fees by the mortgage lender. In most cases, the fee covers several months' worth of insurance and tax payments to seed the buyer's loan escrow account.

Recording fees. Buyers pay recording fees to the city or county where the property purchase took place. The fee covers recording documentation on the purchase.

Closing Costs for Property Sellers

Sellers also must cover certain home purchase closing costs. These fees and charges are at the top of the list:

Mortgage broker commission. This closing cost is the obligation of the property seller, and covers work completed by the real estate broker.

Mortgage lender's title insurance. Property sellers typically pay title insurance costs, although insurance that protects the buyer is paid by the property buyer.

Sales commissions. While the buyer bears the burden of most closing costs, the seller must pay one of the most expensive closing cost charges - the property sales commission. This cost typically runs up to 6% of the total purchase price, depending on the contract between the seller and the real estate company that handled the sales process.

Home warranty fees. These fees aren't always mandatory for a property purchase, but many buyers ask for them as a condition of buying the home. It's a "good faith" warranty that could spike interest in buying the home.

It's also worth noting that some potential closing costs aren't really necessary at all.

For example, courier fees, which cover the physical delivery of key property sale transaction documents, aren't as critical in the age of digital documents and contracts. Additionally, many administrative fees can be bargained down, or out completely, when the buyer and seller negotiate the purchase price, as a means of closing the property sale.

How to Bypass Closing Costs

Property buyers can avoid closing costs in several ways.

The most common method is to negotiate down closing costs, as a means of expediting a deal between buyer and seller. In this instance, more closing costs may become the responsibility of the seller, or the seller and mortgage lender may agree to cut closing costs or roll them into the long-term cost of the home mortgage.

A word of caution. If you agree to have closing costs be rolled into the mortgage, your lender may raise your loan interest rate to recoup its costs. Make sure to read your mortgage loan contract carefully to mitigate that situation.

Additionally, lower-income home buyers may qualify for government help on closing costs, especially when they obtain government-backed loans to buy a home. Check with your lender to see if you qualify for closing-cost help well before settlement day.

The Takeaway

Closing costs are a fact of life for home buyers and sellers.

Consequently, understanding closing costs and the impact of related fees and charges on the total home transaction amount, along with interest charges from the mortgage lender, is job one for both home buyers and sellers before signing off on any property deal.