Buying and selling a house can be an exhausting process.
Whether you are the buyer or the seller, you’ll find yourself having one final hurdle to face at the end of the process: closing costs.
It may surprise you to discover just how much closing costs can end up becoming.
Why Are Closing Costs So Expensive? (10 Reasons)
Closing costs tend to be around 3% to 5% of your loan amount.
Both the buyer and the seller often end up paying some part of these various fees and taxes.
Who pays what exactly depends on the terms of the deal.
However, a few factors like tax rates, fees, and insurance rates can make your closing costs even more expensive.
Let’s look at these factors in more detail.
1. Real Estate Transfer Tax
One reason why closing costs are expensive is that you have to pay a real estate transfer tax or deed tax.
It’s usually the seller who ends up paying the fee.
This is a tax charged by the state to the seller of a property.
The amount you pay depends on the house’s final selling price.
As such, the more expensive the house is to buy, the higher tax you have to pay.
The seller usually takes the money they earned from the sale to pay for the tax.
The exact rate of the tax depends on the state you live in.
Some areas waive the fee entirely.
Some states also have more expensive tax rates than others.
Because of that, it’s important to look into the tax rate of a state if you plan on switching states.
You may find that it’s incredibly expensive to sell a home there.
In addition, you have to pay the tax at the time of closing.
If, for whatever reason, you don’t have the funds available to pay the tax, the closing may not move forward.
Since it’s the state that levies the tax, they’re the one who gets the funds.
This is different from many of the other taxes associated with closing costs.
Those taxes tend to go to the IRS.
The state uses the money from the real estate transfer tax to fund certain projects or pay its employees.
Closing costs are expensive because your real estate transfer tax could be quite expensive.
2. Title Search Expenses
Another major part of closing costs that makes them expensive is title search expenses.
Typically, you don’t worry about whether the person selling the home has a right to do so or not.
You usually assume that because the person is putting the home up for sale that they have the right to do so.
That isn’t always the case.
The individual selling the home might not have the right to do so.
Someone might have a lien on the home, for example, which impedes the seller from selling it.
It’s even possible that the seller isn’t the rightful owner at all.
To ensure that the seller is the one who has the right to sell the home, a mortgage lender will perform a title search.
However, they expect you to pay for the title search.
A title search means that an individual will look at public records to determine the legal ownership of the home.
If everything checks out, the sale can go through.
However, if it’s discovered that the individual did not have the right to sell the home, you could end up in court with the person who does.
That can be quite an expensive consequence, in itself.
It’s something lenders want to avoid.
That’s why they insist on performing a title search before the closing is official.
Title searches can also make you aware of any unpaid HOA fees or property taxes.
Depending on certain regulations, you may end up having to pay those unpaid fees.
Title searches usually cost anywhere from $75 to $200.
While that may not seem like much in the grand scheme of things, it can make closing costs even more expensive.
3. Title Insurance Costs
Another cost that adds to closing costs is title insurance.
Depending on your lender, they may require you to purchase title insurance.
Title insurance protects both you and the lender from a situation in which you find out that the seller isn’t the owner of the property.
If someone else puts a claim on the house, for example, they’ll bring you to court to determine who the true owner is.
That means you’ll face court costs.
Title insurance covers those court costs and protects you.
In particular, title insurance protects you once you’ve purchased the home.
It kicks in if anyone comes forward with a claim on your house.
The last thing you want is to buy a home thinking you’ve owned it only to discover that someone else actually owns it.
You could find yourself without a home.
Title insurance protects your finances while the court handles the ownership problem.
Of course, that means you have to pay for the insurance.
Like any other insurance policy, it all comes down to the rate.
If you have a high rate on your insurance policy, you can expect to pay a good amount of money before the closings occur.
If you have a low rate, your insurance may not be quite as expensive.
Title insurance lasts until you pay off the mortgage.
In some cases, it can also extend to anyone who inherits the property from you.
Since some insurers also handle closing costs, they may also add fees for handling the closing itself.
Otherwise, closing costs are expensive because you have to pay for title insurance.
4. Appraisal Costs
Closing costs are also expensive because you have to pay an appraiser to appraise the value of the home.
This is an important step in buying a home.
The seller can list any price that they want on the house.
However, an appraiser will determine how valuable the house actually is.
They’ll look at certain factors like the location of the home, its property, the number of bathrooms and bedrooms, and how updated the home is.
If things are missing or the property needs work, the appraiser may determine that the house isn’t as valuable as the seller’s listing price.
This impacts the buyer because it means the mortgage lender won’t be willing to give a loan to the seller’s amount.
They won’t be able to make enough money off the deal should the property end up in their hands.
Instead, the seller will need to reduce their price.
This protects the buyer in a way since it keeps them from buying a home that’s inflated in price.
They only pay what the house is actually worth.
Unfortunately, appraisers need to get paid.
This is a fee that you pay as part of your closing costs.
The amount that you pay largely comes down to whom the lender chooses to perform the appraisal.
Some lenders might use expert appraisers who charge high fees for their services.
Others may charge reasonable fees.
You may be able to work with your lender to choose a cheaper appraiser, but regardless, you’ll be paying for their services.
Since that’s another fee that gets added to your closing costs, it makes your overall costs expensive.
5. Home Inspection Costs
Besides appraising the home, your lender will also require you to hire a home inspector.
This is another part of closing costs that makes it expensive.
A home inspection is a vital part of the buying process.
A home inspector will enter the home and take a look at the plumbing, electrical work, roofing, foundational support, and other features of a home.
They’ll determine if everything looks good and up to code or if anything needs fixing.
Buyers can use the information given to them by the home inspector to help lower the cost of a home or negotiate with the seller.
For example, if the home inspector discovers that the roof needs fixing, the buyer can ask the seller to perform that task before they move forward with the sale.
The buyer might agree to pay more for the house if the seller completes the project in return.
Home inspections also make buyers aware of projects that they may need to tackle if they choose to buy the home.
If the seller is selling the home “as is,” it means they’re not going to do any further work on it.
It falls to the buyer to make those repairs and changes.
A home inspection can tell them just how much work the home needs and its relative cost.
This can then help them determine if they need to contact the lender for more money or not.
Like appraisers, home inspectors also need to get paid for their services.
The buyer is usually able to choose the inspector that they want to use.
As such, you might be able to save on costs by hiring one who has cheap rates.
However, you’ll want to make sure that you’re paying for a high-quality inspector, too.
If the home inspector overlooks something, you could be paying for it down the line.
6. Attorney Fees
Attorney fees are another part of your closing costs.
Not every state requires you to have an attorney to buy a home or close on a home.
Those that do, however, are going to add their fees to your closing costs.
An attorney’s primary function is to ensure everything is legal during the signing process.
They look over the documents, ensure everything is correct, and then oversee the transfer of ownership.
It’s a relatively simple job, but some states want to make sure that everything gets handled legally.
The problem with attorneys is that some of them have very expensive fees.
Even something as simple as closing fees can become pricey.
You’re not always able to choose the attorney either.
The real estate agent might appoint one, the lender might appoint one, or even the state might appoint one.
Depending on whom they choose, they might end up picking an attorney with expensive prices.
As a result, your closing costs end up becoming more expensive.
7. Homeowners Insurance Costs
Another major part of your closing costs is your homeowner’s insurance costs.
When buying a home, your lender will sometimes require you to pay for your insurance upfront.
In particular, they may require you to pay the amount for the rest of the year upfront.
Then, when the new year comes, your insurance costs will add to your mortgage as usual.
This might be because the year is coming to a close in just a few months.
Whatever the reason, it’s something the lender might require from you.
If so, you could end up paying several hundred dollars in addition to your other closing costs.
Homeowner’s insurance is often based on the value of the property and any associated risks.
For example, if the home is in an area that sees a lot of hurricanes, the insurance policy is likely going to be expensive.
Homeowner’s insurance covers certain repairs that occur due to theft, storm damage, or other types of damage.
It extends to certain belongings, too.
The more valuable your home is, the more expensive your policy is going to be.
That’s because the insurance needs to pay more money to replace those things.
If your home uses marble countertops, for example, it’s going to cost the insurance company more to replace those marble countertops.
To ensure they’re able to cover your expenses and still earn a profit, they give you a high rate on your insurance policy.
You can make your closing costs and your monthly payments a bit cheaper by looking for a policy that offers a low rate.
Otherwise, you can expect your closing costs to be expensive.
8. Property Taxes
Another important aspect of your closing costs is property taxes.
Property taxes get applied to each property in the area.
They’re the taxes that the state uses to pay for certain organizations and programs.
Everyone pays a certain amount.
Your lender may require you to pay a certain amount of property taxes upon closing on the house.
Not unlike homeowner’s insurance, it may be because it’s close to the end of the year.
They might expect you to pay the property taxes for the remainder of the year upfront.
If they do, those taxes become part of your closing costs.
Depending on how expensive the house is and its location, this could easily add several thousand dollars to your closing costs.
9. Survey Fee
Closing costs are also expensive because of a survey fee that you need to pay.
Before a lender approves your loan, the company might ask you to pay for a surveyor.
The surveyor will take a look at the land on the property.
They’ll determine if it’s safe or if there are any problems with the land.
For example, if the property has a septic tank, they might discover that the drain field is no longer functional.
They might also find that the land isn’t suitable for home additions.
The surveyor can then help you come up with a plan to fix certain aspects of the land.
Like the others, you’ll need to pay the surveyor for their services.
Depending on how expensive they are, your closing costs could end up becoming more expensive as a result.
10. Realtor Fees
A final fee that you need to pay as per your closing costs is your realtor fees.
A realtor usually gets some amount from the sale.
They could also charge you a flat fee instead.
However they make their money, you’re going to need to pay them to close on the house.
A realtor helps you find a home and market your own home if you’re selling it.
They do a lot of the footwork of finding houses that meet your budget or criteria.
They also handle all the paperwork to make the process of buying a home as easy as possible.
Since they’re heavily involved in the process of buying and selling a home, you can expect to pay them a good amount of money.
That amount can make your closing costs expensive.
Closing costs are expensive because they cover a variety of different costs and fees.
Certain factors like tax rates, insurance rates, and service fees can make your closing costs extremely expensive.