Closing Costs: What are they? Who pays them? How to avoid them?

Closing Costs: What are they? Who pays them? How to avoid them?

Buying or selling a house can be a massive headache if you’re not familiar with what you’re doing. And sometimes, even the pros can get frustrated with the myriad of issues sneaking past them. No one expects terrible surprises to happen, but a wise person always prepares for them. One such issue is the closing costs.

Closing costs are the fees and expenses (approx. 2-5%) paid to close a mortgage when buying/refinancing a house. While the buyer pays for most of them, sellers can expect to pay a few too. The average closing costs in the US and Georgia were $6,087 and $3,610 respectively in 2020.

I understand that having to pay these closing costs can have a significant financial impact. On the flip side, if you were to prepare for paying an extra 2-5% on your mortgage but didn’t have to pay it, wouldn’t that be great? You could do so much with your house with an extra three to six thousand dollars in your pocket.

Am I implying that closing costs are optional? Absolutely not. I’ve been working with Georgia’s real-estate market for two decades now, and closing costs are a legal mandate. In this guide, I’ll explain everything you need to know about closing costs and how you can avoid paying them altogether. 

1. What do closing costs include?

The first thing you need to understand is what type of closing costs there are and how much you can expect to pay.

Average closing costs are typically between 2% & 5% of your loan value in the United States and 3% & 6% for Georgia alone. Let’s use an example for further explanation.

According to BOA, total closing costs for a $300,000 house with a $30,000 down payment (10% of property value) and a 15-year fixed mortgage in Atlanta, Georgia are $10,092 (3.7% of loan value). After adding $18,000 (6% real estate agent commission), the total cost is $28,092.

This includes $3,818 in lender fees, $1,436 cash, and $472 in escrow funds for insurance and taxes, and $4,366 for other fees such as appraisal, title fees, etc.

While the buyer pays most of the closing costs, sellers have their own closing expenses as well. A seller generally pays for both real estate agents’ commissions and different types of fees at the time of closing. The buyer, on the other hand, pays for loan-related fees.

I. Closing Costs for Sellers in Georgia

Here’s the list of closing costs based on the current median property price in Georgia – $228,599. The expenses are divided between average rates in Georgia and rates provided by Bank of America’s closing costs calculator for a property value of $228,599 with a 15-year fixed mortgage and 10% down payment.

Closing Costs for Sellers  in GeorgiaAt $228,599Average Cost
Real Estate agent commission4 – 6%4 – 6%
HOA Fees & Utility Bills
HOA Estoppel LetterN/A$200 – $500
Prorated Property Taxes
Title Settlement & Escrow Fee$1,260$350 – $600
Title SearchN/A$100 – $200
Municipal LiensN/A$100 – $200
Documentary Stamps on Deed or Transfer Tax$229~0.1%
Closing Costs for Sellers in Georgia (Note: N/A means that the cost wasn’t available on the BOA website.)
  • Real Estate Agent Commission: If you’ve employed the professional services of a real estate agent, then you’re liable to pay the commission for both your realtor and the buyer’s realtor. Realtors typically charge a 3% commission on the property value, so you’ll be expected to pay $13,715.94 (6%) at the time of closing.

However, I strongly recommend saving $13,000+ and not hiring a realtor. Here’s my complete guide on how to buy/sell a house without a realtor.

  • HOA Fees & Utility Bills: As the previous homeowner, it’s your responsibility to pay all the outstanding bills and HOA fees and make sure there’s nothing due against the house. Ongoing costs such as water and electricity will be prorated to your closing day.
  • HOA Estoppel Letter: An estoppel letter or a certification from Homeowner’s Association is mandatory and generally costs between $200-500$ in Georgia. This letter confirms that you don’t owe anything to the HOA and are in good standing with them. This is necessary because HOA has the authority to put a lien on your house if your dues aren’t paid.
  • Prorated Property Taxes: You’re also required to pay the property taxes for the number of days you owned the house. Like the ongoing bills, these taxes are prorated to your closing date, starting from January 1st.

For example, if your closing date is November 1st, you’re required to pay property tax for 300+ days, and if your closing date is February 1st, you’ll only pay property taxes for 31 days.

  • Title Settlement & Escrow Fee: While title settlement is generally handled through a lawyer, Georgia doesn’t require you to hire one. However, you’ll still have to pay $300 – $600 for the title settlement and escrow company for their services. 
  • Title Search: A title search is required to ensure no outstanding liens on your property. A title company will handle that for you for $100 – $200.
  • Municipal Liens: While a title search looks into public records, you can still have unrecorded liens on your property for minor violations such as open or expired permits, code violations, etc. These are known as municipal liens, and their search generally costs between $100 – $200.
  • Documentary Stamps on Deed or Transfer Tax: This tax is paid to your local county when the deed is recorded, and the cost varies between different counties.

Did you read the word lien a bit too much and get anxious? Here’s my complete guide on handling property liens.

II. Closing Costs for Buyers in Georgia

Here’s the list of closing costs based on the current median property price in Georgia – $228,599. The expenses are divided between average rates in Georgia and rates provided by Bank of America’s closing costs calculator for a property value of $228,599 with a 15-year fixed mortgage and 10% down payment.

Closing Costs for Buyers in GeorgiaAt $228,599Average Cost
Loan Origination Fees$1,2450.5 – 1.5%
Points Fee (0.953)$1,9610.5 – 1%
Appraisal Fee$560$300 – $500
SurveyN/A$300 – $500
Credit Report$30$25 – $75
Home InspectionN/A$300 – $350
Recording Fees (varies by county)$100$100 – $150
Tax Service Fee$89$50 – $100
Flood Certification Fees & Life of Loan Flood Monitoring$14$15
State Tax/Stamps on Mortgage$638
Lender’s Title Insurance$613$1000 – $2,000
Owner’s Title Insurance$400$500 – $2,000
Georgia Residential Mortgage Act$10$10
Closing Costs for Buyers in Georgia (Note: N/A means that the cost wasn’t available on the BOA website.)
  • Loan Origination Fees: You only have to pay these costs if you’re buying on a mortgage. Loan origination costs include application fees, prepaid interests, and other fees you paid to get the mortgage from your lender.
  • Points Fee: Points fees are paid upfront when closing to reduce the interest rate on your mortgage. You can expect to pay 0.5-1% of your property value on point fees.
  • Appraisal Fee: Your lender requires an appraisal fee to determine whether the property value is equal to the loan value or not. Appraisal fees are required before the mortgage is approved, so they’ll be paid via a card and won’t be included in your due amount at the time of closing. You can expect to pay between $300-$500 for appraisal fees.
  • Survey: Survey fees are optional and depend on whether your lender requires it or not. You can expect to pay $300-$500 to a survey company that will survey the location and neighborhood of your property and report back to your lender.
  • Credit Report: Your lender will pay $25-$75 on average to pull your credit report for your mortgage.
  • Home Inspection: Home inspection is conducted to check for any significant damages to the home’s foundation and design. A home inspection generally costs around $500-$600 on average, but you can expect to pay $300-350 in Georgia.
  • Recording Fees (varies by county): Your local county will charge you a recording fee for closing the sale and transferring the ownership so that it can become a public record. This can cost you between $100-$150, depending on your county.
  • Tax Service Fee: Tax service fees are paid to an outside company that monitors your house’s taxes and reports back to the lender. This is done to ensure that no liens arise on the house and lender’s mortgage is safe. The lenders often waive the tax service fee, so make sure you ask for a discount before paying!
  • Flood Certification Fees & Life of Loan Flood Monitoring: In the state of Georgia, you’re also required to get a flood certification on your house since the area is prone to floods and other disasters. You’ll also be required to get flood insurance by your lender depending on the number of recent floods and risk-factor.
  • State Tax/Stamps on Mortgage: While the seller pays for document stamps for deeds and other legalities, you’re required to pay for document stamps and other state taxes on the mortgage. The amount varies between different counties.
  • Lender’s Title Insurance: Lender’s title insurance is what protects your lender from unexpected liens that might come up and is required by them to follow through with the mortgage. It generally costs between $1,000-$2,000.
  • Owner’s Title Insurance: Your lender’s title insurance will only protect your lender and not yourself. You should consider buying an owner’s title insurance, which usually costs between $500 and $2,000.

While the rates for title insurance are decided by the State of Georgia and vary based on the value of the house, different insurance companies can provide different facilities for the same rate. Make sure you search correctly.

  • Georgia Residential Mortgage Act: According to the Georgia Residential Mortgage Act, the state of Georgia can charge you $10 on your mortgage loan.

III. Should a seller pay for the buyer’s closing costs as well?

While it’s not customary to pay for or help with the buyer’s closing costs, it’s worth looking at. If you’re selling a house and aren’t looking to rent instead, you’ve probably either already bought a house or are in the process of buying one.

As a buyer yourself, you understand how overwhelming it can be to deal with different costs and expenses in the most effective way. As a seller, your primary goal is to sell the house at the most realistically premium price while ensuring the sale goes smoothly.

If you’re already getting a good deal for your house and can spare some extra money to help the buyer with their closing costs, you may consider doing so to close the sale as soon as possible.

Read More: How to buy a house while selling your own: Steps, Tips & Precautions

IV. How much should you expect to pay in 2021?

According to the report by ClosingCorp, average closing costs in the United States saw a 5.9% year-over-year increase with the cost being $6,087 (including taxes). If the market follows the same financial patterns thanks to the ongoing pandemic, you can expect to pay $6,447 in closing costs as a national average and $3,823 in Atlanta, Georgia.

However, don’t get comforted by averages since you don’t know which end of the spectrum you could be on when buying or selling your house. Here are the highest and lowest average closing costs in ClosingCorp’s 2020 report.

StateHome PriceClosing Cost% of mortgage
District of Columbia $710,669$29,329.894.13%
New York$440,393 $13,261.673.01%
Maryland$355,170 $11,709.743.30%
Highest Average Closing Costs
StateHome PriceClosing Cost% of mortgage
Kentucky$184,198 $2,229.031.21%
Lowest Average Closing Costs

2. How to calculate your closing costs?

Using estimates to plan the sale/purchase of your house is a good idea because you don’t want any unwanted surprises. However, you don’t want to rely on estimates forever.

What if you prepare for $10,000+ in closing costs, but it ends up being more than $15,000? It may be tough to manage that extra $5,000. This guide can help you prepare, but you still need the exact amount for the closing costs to be ready to pay on the closing date.

Does that mean you need to visit all the county offices and inquire about the particular costs? No, the silver lining of getting a mortgage is that your lender is required to give you your closing costs. However, don’t confuse it with rough estimates such as “closing costs worksheet” or “fee itemization” that some lenders offer.

Your lender is required to give you a Loan Estimate (LE) when you first apply for the loan. Subsequently, they’re required to give you a Closing Disclosure Document outlining all the closing costs at least 3 days before the settlement day.

Once you receive that document, don’t accept it right away. You can negotiate a few fees and expenses on that sheet.

3. How to lower closing costs?

Yes, there are many ways to reduce your closing costs and save a few hundred or even thousands of dollars. You can use this money to further upgrade the home you bought. And you know what they say – money saved is money earned!

So, let’s earn you some money. Here are a few tips that I learned through my twenty-plus years of experience in real estate.

I. Ask the Seller to Divide the Costs

Sometimes, you have to get up and ask for things; this might be one of those times. I’ve already explained why it’s beneficial for sellers to contribute to the closing costs. Since the seller is also paying daily expenses for holding off the property, many might be interested in contributing and getting the deal done ASAP.

II. Talk to Your Bank Manager

Many banks in Georgia offer special discounts and rebates for eligible mortgagors on their loans. For example, if you’re eligible for a Preferred Rewards program with your bank, you can potentially save $200-$600 on the origination fee.

III. Inquire With Multiple Lenders

You wouldn’t buy the first phone or car you see on the market, why do that with lenders? Compare the Loan Estimates from multiple lenders and choose the one offering you the most at a fair price.

IV. Buy a Few Services Yourself

Remember when I said you could negotiate a few of the fees and expenses. In your Loan Estimate, go down to the “Services You Can Shop For” section. You’re allowed to choose your providers for services like home inspection, survey, title insurance, title search, escrow agency, etc.

Don’t miss this opportunity; ask your friends and family for referrals, check online reviews and choose these services yourself. You can save hundreds of dollars on title insurance and settlement services alone.

V. Negotiate Your Lender Fees

Don’t shy away from asking questions, and don’t pay for anything you don’t understand. Lenders often bundle up various costs and add bogus fees such as “funding” in your LE. Ask your lender about them, and don’t pay until you’re satisfied with the answer.

Read More: Should I Sell My House? The Step-by-Step Guide to Help You Decide

4. What if you don’t have the money to afford closing costs?

In my professional experience, the best way to pay closing costs is to pay them cash as a one-time expense out of pocket. If you don’t have enough savings, I suggest you wait before you buy.

However, there are times when waiting is not an option, and there isn’t any way to magically whip up cash.

If you don’t have the money for closing costs, you can ask your lender for a no-cost-closing mortgage, and your lender will add the closing costs to your mortgage. You won’t have to pay the fees upfront, but it’ll slightly increase your monthly payments and the interest on your loan.

5. How to avoid closing costs altogether and save thousands of dollars?

If you’re familiar with my blogs, you already know the option that can save you the most money in any real estate deal – selling your house to a Real Estate Acquisition company for cash.

By selling your house to a Real Estate Acquisition Company like JWS Acquisitions, you can settle with ZERO closing costs out of pocket and get upfront cash for your property within the next 8-11 days depending on your HOA standing.

And, don’t worry, there’s no catch or obligations. The only difference is that we’ll be paying the closing costs on your behalf. Just ask for your cash offer, and you’ll receive it within 24 hours with no commitments whatsoever.

Once everything is discussed and agreed upon by both parties, we can finalize the deal within a week or two. And you’ll be happy to know that statistically, real estate acquisition companies like JWS Acquisitions can offer more for your house than the average buyer because of our rental-based business model.