Closing Costs Explained

Sometimes all the contracts, fine print, and complicated jargon can make real estate feel inaccessible and overwhelming – especially for first-time buyers and sellers. We particularly get a lot of questions about closing costs – what are they, who pays them, how much of my savings do I need to allocate to them? 

At Vermont Real Estate Company, we guide you through your real estate journey from start to finish to make your home buying (or selling) process as seamless as possible. We compiled this quick guide to closing costs so you can feel confident and well-equipped in approaching any real estate transaction.

What Are Closing Costs?

Closing costs are one-time fees based on a home’s sales price and the mortgage loan amount. The buyer typically pays these fees in Vermont unless they negotiate with the seller.

They include, but aren’t limited to, bank fees, appraisal fees, attorney fees, state transfer taxes, and annual or title fees. They also include estimated prepaid items for taxes and insurance. The buyer is responsible for paying the first year of insurance upfront and any prorated taxes. They also, legally, must be disclosed in advance to buyers and sellers before a real estate deal can be completed. Some of these fees are paid to buyers’ lenders, and others are paid to third parties such as inspectors, appraisers, and title companies. 

While buyers and sellers both pay closing costs, buyers are usually responsible for covering most of them unless they negotiate with the seller to help them cover their share of the costs. We call these seller concessions, but it might be difficult to negotiate this concession with a seller in today’s market. Most closing costs are due on closing day, but inspections, certifications, or land surveys are due before closing if the buyer has added an inspection contingency.

How Much Can I Expect to Spend?

In Vermont, closing costs typically land between 3.5% to 4% of the home’s purchase price – so if you’re buying a property for $300,000, you could spend around $11,000, with closing costs totaling around $8,000 and prepaid items adding another $2-3,000, depending on taxes.

Sellers’ closing costs usually include agent commissions, which usually land around 6%, and approximately $1,000 in attorney fees.

Many factors contribute to how much buyers and sellers spend on closing costs. For buyers, it depends on their loan’s size, terms and conditions, and their lender’s practices. For sellers, it depends on what they’ve negotiated in terms of commissions with their agents and sellers’ concessions with their buyers.

To estimate your closing costs as a buyer, review the Loan Estimate given to you by your lender during the loan application process – or just multiply the property’s sale price by .05 to find your maximum potential closing costs and .02 to find the minimum. The total fee will fluctuate due to interest rate fluctuations, but having a general idea of where the number will land can help you financially prepare. 

What Are The Sellers’ Fees?

While buyers’ closing costs come straight out of pocket, sellers’ closing costs are deducted from the total profit they’ll make on the house they’re selling. Buyers often pay a higher total in closing costs, but negotiations can be made for the seller to pay more.

Sellers fees' often include, but aren't limited to: 

Buyer and Seller Real Estate Agent Commissions - Generally the biggest closing cost sellers pay and negotiated with your agent when you list your home.

Title Insurance - If an unexpected problem with the title comes up after closing, this insurance can protect the seller (and the buyer, should they choose to opt-in for their own policy). 

Escrow/Attorney/Settlement Fees - Paid to the escrow agent, title agent, or attorney handling the closing. Sellers and buyers often split this, but it can be negotiated for only one of the parties to pay.

Loan payoffs, mortgage payoffs, etc. - Any outstanding amounts on the property owed by the seller (like utility bills, property taxes, homeowners insurance, HOA dues, etc.) will have to be paid at closing.

Sellers Concessions - Seller contributions to buyer closing costs as negotiated in the buyers’ offer.

Many of these items, however, can be negotiated by contract and vary by location.

What Are The Buyers’ Fees?

Not all buyers’ fees are created equal. As a buyer, your closing costs depend on your specific lender, loan type, and where you live. Some fees are required by the government, while some are required by your lender, and some are altogether optional and dependent on your specific situation.

Buyer closing costs often include, but aren't limited to:

Title Search Fee - This ensures sellers are the official homeowner before being able to sell. The search tries to find claims, bankruptcies, or other outstanding charges on the property the buyer wants.

Loan/Mortgage Application Fee - These fees are charged by lenders for processing and underwriting a loan application. The total cost can vary but generally lands around $500.

HOA Transfer Fees - These fees cover the expenses to the HOA for transferring ownership from seller to buyer. HOA transfer fees are not to be confused with HOA fees, which cover all the perks and amenities of living in a managed community (like landscaping, maintenance, etc.).

Credit Report Fee - For lenders to ensure buyers’ financial situation stays stable through the closing process, there will be at least one, if not several, credit reports buyers must pay to receive.

Home Inspection - To put the buyers’ minds at ease and ensure the asking cost is fair for the state of the home, inspections guarantee there are no significant structural or systemic issues with the property. 

Appraisal - This report validates the current value of the property to ensure a fair market value for the lender

Homeowners’ Insurance - Typically, buyers are responsible for paying the first year of insurance upfront.

Property taxes - This includes local property taxes prorated from the closing day – the average in Vermont is 1.86%.

Mortgage insurance - Lowers the lender’s risk of making a loan to the buyer, protecting the lender against major losses should any issues arise.

Closing Fee - This fee goes to the attorney or escrow agent/company that conducts the closing meeting.

Transfer Fees/Taxes - Specifically in Vermont, Property Transfer tax is the tax on the transfer of title to real property, and it applies to both acquisitions of a controlling interest in an entity with title to a property and property transfers by deed. Buyers are taxed 0.5% of the first $100,000 of the home’s value and 1.45% of the remaining portion of the value.

Buyers’ lenders will give them a Closing Disclosure at least three business days (minimum) before your closing meeting. This document will describe the most critical aspects of the buyer’s mortgage loan. Buyers should take their time carefully reading this document to ensure they understand all their loan terms before signing.

How Can I Reduce Closing Costs?

There are a few ways that buyers and sellers can attempt to reduce their closing costs.

Negotiate buyer/seller concessions. 

With a buyers’ concession agreement, an offer on a home comes with a contingency note requesting the seller to cover a certain amount of closing costs. This can go the other way around, as well, where the seller will only allow the buyer to purchase the property on the condition that they take on some of the sellers’ fees. 85% of sellers make trade-offs with the buyer to facilitate a home sale, according to the Zillow Group Consumer Housing Trends Report 2020.

Shop around and compare lenders.

As a buyer, your lender and their policies can make all the difference in the total closing costs you pay, so make sure to take your time assessing your options. Read the fine print, and don’t be afraid to ask questions about initial loan estimates or negotiate loan-specific fees (especially if they appear duplicated or overprocessed).

Apply for first-time buyer assistance programs.

FHA’s programs insure your loans so lenders can offer you better deals. Vermont also has state-specific homeownership assistance programs – check them out here.

Use a no-closing-cost loan.

Beware the misleading name; this loan should really be called the “no-upfront-closing-cost loan.” While it allows you to roll the closing cost fees into your total loan amount, you will still have to pay them eventually.

Roll closing costs into your mortgage.

Like the no-closing-cost loan, this can help put off immediate fee payment – but do your research with this option because you’ll potentially pay higher interest rates.

Schedule end-of-month closing.

This can help cut down on prepaid daily interest charges.

Explore rebates or incentives with your bank.

Talk to your bank about any rebates or incentives they offer during home buying.

Whether buying or selling, having a good handle on closing costs and how you approach them can help real estate transactions go smoothly for all parties.

Connect with one of our friendly and knowledgeable agents to start your real estate journey today.