Buying or selling a home in Texas can be a daunting task, especially when it comes to the financial aspect of the process. One financial component that homebuyers and sellers often overlook are the closing costs. The closing costs in Texas can be quite significant and play a major role in the final sales price of the property. In this article, we’ll look at what these costs entail, who pays them, and how much average closing costs are.
An Overview of Closing Costs
Closing costs refer to the fees that come into play during the closing process of buying a home. Some of the fees are paid prior to the close of escrow and some are paid at the close of escrow. Some of the fees incurred prior to close include a home inspection report, a pest inspection report, and an appraisal report. A home inspection report can cost anywhere from $250 to $500, depending on the size of the home, while a pest inspection report can run anywhere from $50 to $250. Appraisal reports cost anywhere from $500 to over $1,000, depending on the size the cost of the property. Appraisal report fees are also sometimes paid at close instead of prior to close.
Some of the fees paid at the close of escrow are listed below:
- Credit Report
- Escrow Fee
- Owner’s Title Insurance
- Lender’s Title Insurance
- Appraisal Fee
- Property Survey Fee
- Notary Fee
- Discount Points
- Mortgage Origination Fee
- Underwriting Fee
- Loan Processing Fee
- Notary Fee
- Recording Fee
To be clear, not every escrow includes all of these fees. But, they are all examples of fees seen at closing. The owner’s title insurance ensures that you have clear title to the property and that no other individuals or entities are making claims to it. The lender’s title insurance ensures that there are no liens against the property and that your lender has the first lien or is in “first position.” The appraisal fee is self-explanatory. The survey ensures there are no encroachments on your property. Discount points and origination fees are charged by lenders typically to “buy down” an interest rate, but they tend to be rare in today’s lending environment. Some but not all lenders charge for underwriting and loan processing too, and these fees can come with different names. The notary fee is charged by the notary public who oversees he signing of your loan documents, and the recording fee is charged by the county to record your grant deed and mortgage.
While the exact amount varies, closing costs generally add to about 2% to 5% of the home’s overall purchase price – depending on the price of the home. The percentage is much larger lower priced homes. Texas, in particular, is known for having closing costs on the higher side when compared to national averages. The specific costs, however, can be influenced by a range of factors and can significantly impact the ultimate price that buyers and sellers pay or receive for a property. In real dollar terms, the out-of-pocket nonrecurring closing costs for a buyer in Texas can range from $3,500 to $4,000 for a $500,000 home.
But, here’s the good news – it is customary in Texas for sellers to help pay for closing costs. Sellers often pick up both the survey and title insurance fees, which can help significantly – and that makes the net fees that buyers end up paying actually lower than the national average.
Again, these are just general charges included in closing costs for homebuyers. Your situation might include additional costs, or some of the above fees may not apply to your situation.
Recurring vs. Non-Recurring Closing Costs
The above discussion only involved “nonrecurring closing costs,” or the one-time-only fees associated with closing an escrow. However, there are also “recurring closing costs,” or the costs that recur after the close of escrow.
Recurring closing costs include the following items:
- Prepaid mortgage interest
- Property taxes
- Homeowner’s Insurance
- HOA dues – if applicable
- Mortgage insurance – if applicable
These fees can often exceed your non-recurring costs, particularly in Texas, where property tax rates are higher than the national average.
How Much are Closing Costs in Texas?
As a home buyer or seller in Texas, it’s essential to have a general idea of what you can expect to pay in closing costs. In the Lone Star state, the closing costs are generally between 2-5% of the home’s total sales price, as mentioned above. When seller contributions and both nonrecurring and recurring costs are accounted for, Texas buyers might see total closing costs in the $6,000 to $15,000 range for homes in the $300,000 to $500,000 price range.
However, this is merely a ballpark figure, and actual amounts can fluctuate. Various elements can influence these costs, such as the interest rate of the home loan, the appraised value of the house, and where it’s located.
It’s crucial to keep in mind that these costs are an integral part of the home buying process and should be factored into your budget from the outset. While these costs may seem steep, they are often necessary to ensure a smooth and legal property transfer – that protects buyers, sellers, and lenders.
Who Pays the Closing Costs, Buyers or Sellers?
In most real estate transactions, both parties involved – the buyer and the seller – shoulder some portion of the closing costs. The particular division of these costs often becomes a subject of negotiation during the transaction process.
Generally, the buyer is responsible for expenses tied to their mortgage loan, including the loan origination fee, appraisal fees, and any costs linked to the property title. On the other side, the seller usually pays for the real estate agent commission, which typically ranges from 5-6% of the home’s sales price, and other costs associated with getting the property ready for sale. The March 2024 NAR Settlement may change the nature of commissions and how they are paid, but as of the date of this blog’s edits, the full manifestation is not yet known.
In any case, these are the current somewhat standard practices, and they are not set in stone. The exact distribution of the closing costs can differ based on the specific agreement reached between the buyer and seller during the negotiation process.
For instance, in a market favorable to buyers, sellers might agree to shoulder a greater share of the closing costs to expedite the sale. Alternatively, in a seller’s market (where there are more buyers than sellers), buyers might offer to cover a portion of the seller’s closing costs to stand out amongst other potential buyers. It is beneficial to have an experienced real estate agent to guide and provide counsel during these negotiations.
Breaking Down Closing Costs for Buyers
As a prospective homebuyer in Texas, it’s important to understand the different elements of the closing costs that you may be responsible for. First and foremost is the loan origination fee, which is what your lender will charge for setting up your mortgage. This fee varies depending on the mortgage lender, but most mortgage lenders tend to be in the same range and most tend to offer what are called “no points” loans, where the origination fee is minimal.
Another key component of closing costs for buyers is the appraisal fee. This covers the cost of a professional appraiser evaluating the property to ensure the asking price aligns with the market value. Appraisal fees have risen substantially over the last ten years and can be as high as $1,000 or more in outlying or rural areas. Depending on the size of the property, expect to pay $500 or more in urban areas. Very large or expensive properties can easily command fees in excess of $1,000 as well.
Then we have the title search fees, which cover the research necessary to confirm that the property’s title is free and clear of any claims or liens. This step is crucial in any real estate transaction as it ensures that you’re legally able to purchase the property and that nobody else is making a claim for it, as mentioned above.
Insurance premiums and home warranties are additional costs that buyers should anticipate. While not required, home warranties can offer peace of mind by covering certain repair costs in your new home. Insurance premiums, such as those for homeowners’ insurance and private mortgage insurance, may also be due at closing, providing vital financial protection.
These various charges compose the bulk of a buyer’s closing costs, but it’s essential to remember that they can be influenced by numerous factors, including the home loan’s interest rate, the property’s appraised value, and even the house’s location in Texas, as locations impact both property tax and insurance rates.
Negotiating Closing Costs
Understanding that closing costs can be a significant part of any real estate transaction, it’s worth noting that these fees aren’t always set in stone. The allocation of these costs between the buyer and seller is often a matter of negotiation, influenced by the current housing market conditions.
An experienced real estate agent can play a crucial role during these negotiations, providing valuable insights and strategies based on their understanding of the market. This can potentially save you thousands of dollars and make the buying or selling process more seamless.
Frequently Asked Questions
Here are some commonly asked questions related to closing costs in Texas:
How can I reduce my closing costs in Texas?
Costs can be reduced through negotiation between buyer and seller, by requesting a credit from your lender, or by requesting seller concessions. Keep in mind, though, that lender credits often result in higher interest rates – which are necessary to cover the cost of the credit.
Are closing costs tax deductible in Texas?
Certain closing costs, such as mortgage interest and property taxes, can be tax-deductible. Consult a tax professional for specific advice.
Can closing costs be added to the home loan?
In some cases, lenders may allow buyers to roll closing costs into their mortgage, but often then not they won’t. Buyers, however, can consider making small down payments in order to free up more funds for closing costs. Buyers should be aware, however, that a smaller down payment could result in a higher interest rate and/or a requirement for private mortgage insurance.
Do closing costs vary within Texas?
Yes, costs can fluctuate significantly depending on factors such as geographical location (urban vs. rural), insurance rates, interest rates, complexity of the transaction, and the purchase price.
Are home warranties and insurance premiums always part of closing costs?
Home warranties are not mandatory, but homeowners’ insurance is almost always required – particularly if you are getting a mortgage to finance your purchase, as all mortgage lenders require insurance.
Remember, the exact details of your closing costs will depend on your specific transaction and circumstances. Always consult a trusted real estate professional for advice tailored to your situation.
Get Help From A Mortgage Expert
Navigating the intricacies of closing costs in Texas may seem complex, but with the right knowledge and guidance, it can be manageable. Understanding the nature and potential amount of these costs, along with who pays them, is crucial in ensuring a smooth and fair transaction.
To learn more about closing costs, getting pre-approved, securing a low mortgage rate, or anything related to the home loan process, contact our team of mortgage experts at JVM Lending. Our team is available seven days a week by phone at (855) 855-4491 or by email at [email protected].
