This sponsored, biweekly Q&A column is written by Andrew Goodman, broker/owner of Goodman, Realtors. Based in Bethesda, Andrew serves clients in Maryland, D.C., and Northern Virginia. Please submit comments, questions, and opinions in the comments section or via email.
Question: What are closing costs and how many are there?
Answer: I like to explain closing costs as being like the taxes and tags you pay when buying a car. Closing costs are basically the fees involved with making the transaction happen. These fees include items for the lender, reserves for taxes and insurance, title charges, taxes and recordation and HOA/Condo dues.
The rule of thumb is that the closing costs for a buyer are going to end up as roughly 3 percent of the sale price.
Brokerage Fees. The seller typically pays for both the buyer and listing brokers’ brokerage fees. However, each party to the transaction could be charged an additional administration fee from their broker. An administration fee typically runs $250-$500, depending on the broker. The brokerage fees are a percentage of the sales price and that percentage is determined between the listing broker and seller at the time the listing agreement is signed.
Lender’s fees. The buyer pays lender fees, which can include an origination charge agreed upon when the buyer locks in his/her rate with the lender. An appraisal fee is typically paid before closing at the time the interest rate is locked in and typically runs $425. A credit report (which is about $100) and a flood certification (normally $25) are also charged by the lender to pay for these items.
Items paid in advance. This deals with the buyer’s prorated interest. This is the interest that is paid in advance so the buyer’s first monthly payment is a month or so after settlement. The buyer also has to pay for his or her homeowners’ insurance for the first year up front.
Reserves. The reserves deal with starting the buyer’s escrow accounts if the buyer has chosen to escrow for property taxes and insurance. These reserves are to help organize the escrow accounts so the lender has enough funds to pay the taxes and insurance when due. If a buyer is escrowing for taxes and insurance, the buyer IS NOT to pay for their taxes or insurance if they receive a bill. a portion of the buyers monthly payment contributes to pay for the escrow accounts.
Title Charges. Both parties have title charges. The buyer pays for title insurance and has the option to pay for owner’s title insurance if desired. I highly recommend purchasing owner’s title insurance, which I can explain in another column. Both parties pay a closing fee and deed preparation. The closing fee is roughly $350 and the deed preparation is about $250 depending on the settlement company.
Transfer and recordation taxes. Typically in Montgomery County, the transfer and recordation taxes are split equally between buyer and seller. So here is how it is calculated in Montgomery County:
- County Transfer Taxes: 1 percent of sales price
- State Transfer Taxes: 0.5 percent of the sales price
- State Recordation Taxes: $3.45 per $500 for all amount up to $500,000; $5 per $500 for all exceeding $500,000
The first $50,000 used to calculate the State Recordation Taxes are exempt if the purchaser is buying a primary residence.
For first time homebuyers, the buyer’s portion of the state transfer tax is waived.
Additional charges. The buyer could have additional charges for a survey, which could run from $200 to $1,000 depending on the type of survey chosen. If the property is within an HOA or condo association, condo/HOA dues may be due as well as a capital contribution for the building, which is typically two months of dues.
If you would like a more specific break down, please consult with your Realtor and a settlement company.
