How to Estimate Closing Costs When Paying Cash
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When you decide to buy a house, the sale price is only the first expense. Every transaction comes with closing costs, no matter whether you are taking out a mortgage or buying with cash. Closing costs are a variety of charges related to the home sale. They vary depending on the type of transaction, your home’s value, and the state you are in.
Accurately estimating your closing costs is essential for cash buyers. While buyers who are taking out loans can often build the expenses into their mortgages, cash buyers have to pay these costs at or before the closing appointment. You don’t want to be caught off guard with an unexpected expense.
This guide will teach you how to estimate closing costs when paying cash. It will break down the various costs you can expect and why they are included. Here’s what you need to know when tracking your closing costs.
Components of Closing Costs When Paying Cash
Closing costs are often referred to as a single entity, but they are actually made up of several components. Here is a breakdown of common closing costs and what you can expect to pay for each.
Title Search and Title Insurance
A title search is a standard practice for anyone buying a house. The title company will check for any liens on the property or issues that could prevent the sale. For example, if there is a lien from a former contractor, the seller would have to pay the outstanding balance on the contractor’s invoice for the sale to go through. The title search also checks for issues like claims on the property, like a former spouse who doesn’t want the house sold.
After the title search, the title company will secure title insurance for the home. This protects the new owner from title fraud or any issues that arise in the future. Title insurance is optional in a cash transaction, but it is also a nominal one-time fee that protects you as long as you own the home. Talk to the title company if you are unsure about securing this insurance.
For estimating closing costs, you can expect to pay between $75 and $200 for a title search depending on where you live. Title insurance is usually between 0.5% to 1% of the home’s sale price.
Escrow Fees
Escrow is when an objective third party holds onto funds related to a real estate transaction. It is common for a title company to open an escrow account at the start of a deal to hold the earnest money deposit. Once you submit payment for the house to the title company, they will keep it in escrow until both parties have signed their closing documents.
Even though you might not need an escrow account after the transaction is complete, this feature is essential during the buying process. It protects your money and makes it easier to walk away from the deal if necessary.
When calculating closing costs, your escrow fees will be an estimated 1% to 2% of the home’s sale price.
Property Taxes
In most cases, both buyers and sellers pay property taxes at the closing table. They each pay prorated amounts, which means they only cover the taxes for when they own the property. The seller pays property taxes for the duration of the tax year that they had ownership and the buyer covers the remaining amount.
For example, if the tax year starts on January 1 and the seller closes on April 30, they are only responsible for four months of taxes. The buyer is responsible for the remaining eight months of taxes that year.
This is one of the harder closing costs to estimate because sellers need to know how much they are expected to pay for property taxes and when the tax year begins. Gathering this information can help them be prepared to review their closing statements.
However, the average American pays around 1% of their home’s value in property taxes each year. This can serve as a basic guide until you have tax information for your specific property.
Homeowners Association (HOA) Fees
If you are buying a house with an HOA, you may need to add these fees to your closing costs. Many buyers and sellers handle HOA fees in the same manner as property taxes: both parties pay a prorated amount based on when the home is sold. The seller is responsible for their portion of the fees while they lived in the home and the buyer takes over paying the fees moving forward.
As a buyer, you may need to pay part of your HOA fees upfront at closing. Some HOAs allow monthly payments while others require specific fees to onboard you to the neighborhood.
As of 2021, the average homeowner pays $191 per month in HOA fees, around $2,292 per year. When looking at houses, ask about HOA payments before placing bids so you have a complete picture of your monthly costs.
Homeowners Insurance
You might also have to pay your homeowner’s insurance premium at closing. This is common with buyers who apply for mortgages as well as cash buyers. Paying your insurance upfront allows for immediate coverage to protect your home.
For buyers with mortgages, this insurance cost is usually spread across monthly payments that are built into their loans. Cash buyers can work out agreements with their insurance providers to either make annual or semi-annual lump sum payments or to receive monthly bills for their coverage.
The average homeowner pays $2,377 annually for home insurance; however, this varies widely by state, property, and location of the home.
Attorney Fees
You will also see a line item for real estate attorney fees in your closing costs. Some states require the use of a real estate attorney to sell or buy a home while other states recommend the use of these professionals. Your title company or real estate agent may bring on an attorney to make sure all of the documentation is correct and legally binding.
Attorney fees vary by state and by legal professional. You can expect to pay between $500 to $1,500 for a closing. This is usually a flat fee, as opposed to the hourly rate that many attorneys charge for specific real estate services.
Recording Fees
The recording fee is charged by the government for documenting the change in ownership of the property within the county. These government fees are usually around $125 but they can vary by state. This is a one-time fee that the buyer covers, regardless of whether they are paying with cash or have a mortgage.
Inspection Fees
If you hire a home inspector to review the property before buying it, you will need to pay their fees before you close on the house. Some home inspectors will allow you to wait until closing to pay their bills while others want payment before or immediately after services are rendered.
These bills can include standard home inspection costs, along with any additional inspections you schedule. For example, if you request special inspections for the foundation, chimney, pool, or electrical wiring, you will need to pay these costs.
Home inspections can cost between $300 to $600 on average, depending on where you live and the size of the house. These costs may be higher in some regions of the country.
Appraisal Fees
While an inspection is used to understand the state of the home, the appraisal tracks the value of the property and ensures it has a fair sale price. Appraisals are required for buyers who need mortgages but they aren’t always necessary for buyers with cash. That said, some sales may require appraisals for valuation purposes or some sellers might request them anyway.
If you requested an appraisal, you can expect this bill to be added to your closing costs. Your home appraisal fee will range from $700 to $1,00 depending on where you live and the size of the house.
How to Estimate Closing Costs When Paying Cash
Your closing costs should never come as a surprise to you. Your real estate agent should walk you through each expense as it occurs and provide estimated closing costs well before you arrive at the title company to sign these documents. Even before you start the home search, you should be able to request sample closing documents based on your budget and target neighborhoods.
Here are a few ways to estimate closing costs or review potential expenses related to your home purchase. This can make you more informed once you arrive at the closing table.
Review the Purchase Agreement
The first step to get an accurate estimate of your closing costs is to read the purchase agreement. This showcases so much more than the closing date and sales price. It also outlines which party will cover specific expenses related to the home sale.
Look for concessions that the seller has agreed to related to property taxes, HOA fees, and other costs. Instead of negotiating a lower sale price, they might have agreed to cover more of the closing costs, reducing your overall burden. In a buyer’s market, some sellers will take on a larger portion of the total closing costs to make a deal happen.
Reading the purchase agreement will tell you which costs to include your your calculations and which ones to leave off your closing costs estimates.
Request a Closing Cost Estimate from the Title Company
As you approach the closing date, you will start to work with the title company. They will provide detailed instructions to avoid wire fraud and ensure the entire process goes smoothly. Ask your title company representative for an estimate of your closing costs as soon as they contact you. Many will provide this document ahead of time as a courtesy to buyers.
The title company is usually responsible for distributing funds after closing and ensuring each fee, insurance premium, and bill gets paid. This is why they should confidently be able to provide an estimate for your closing costs once both parties involved in the home sale have reached an agreement.
Consult with a Real Estate Agent or Attorney
The next person who can help is your real estate agent. They should walk you through what to expect when you pay closing costs and which fees will be built into the overall expenses. For example, if you do not need an appraisal, there is no need to estimate an appraisal fee.
Real estate agents read closing documents every day, so they should be able to help you understand the estimate the title company provides. They can also draft a mock estimate that illustrates the costs you can expect.
A final resource is your real estate attorney. They might also be able to put together a closing cost estimate for you to review. They should be clear that while the document highlights typical closing costs, it is not legally binding. The estimates could change by the final closing date.
Use the 3% Rule
If you want an estimate of your closing costs but don’t want to break down each expense related to the home purchase, follow the 3% Rule. Cash buyers can pay up to three percent of the home’s purchase price in closing costs once all of the taxes and fees are added up. On the low end, you might pay 1% of the home’s value, but the 3% Rule gives you a strong buffer to cover unplanned expenses.
Using this rule, the closing costs to buy a $400,000 house in cash would be $12,000. On the low end, you might only pay around $4,000 depending on your state and the costs accrued.
The benefit of using the 3% guideline is that you can quickly get a ballpark figure for closing costs for each home you look at. This provides a useful option if you have a wide price range and aren’t sure how much you want to spend. The downside is that it’s wildly inaccurate. Your estimate could be off by thousands of dollars because you aren’t breaking down each cost.
A fair compromise is to use this guide for a rough estimate of closing costs and then work with your real estate agent to get a more detailed amount.
Manually Estimate Total Closing Costs
You can also manually estimate closing costs based on the information outlined in this article. This is a good option if you are just starting the home search process and aren’t sure how much to budget for closing costs.
Manually working through these numbers can also help if you don’t have a closing estimate from the title company and your agent is unable to provide sample documents to work off of.
Here is a closing cost estimate based on a $500,000 home sale in 2024.
Example: Estimating Total Closing Costs for a $500,000 Cash Purchase
- Title Search: Between $75 and $200
- Title Insurance: Approximately 0.5% to 1% of the home’s sale price, which would range from $2,500 to $5,000.
- Escrow Fees: Approximately 1% to 2% of the home’s sale price, which would range from $5,000 to $10,000.
- Property Taxes: Following the national average of 1% of the home’s value, property taxes would be around $5,000 per year before the prorated calculation.
- HOA Fees: Following the national average of $191 per month, this would be around $2,292 per year before the prorated calculation.
- Attorney Fees: Typically $500 – $1,500
- Homeowners Insurance: This example will use the national average of $2,377 nationally.
- Recording Fees: Around $125
- Inspection Fees: Approximately $300 – $600
- Appraisal Fees: Optional, around $700 – $1,000
Total Estimated Closing Costs: Approximately $11,577 – $28,094
The 3% rule places closing costs around $15,000 for a $500,000 home. This estimate proves that you could pay less in closing costs or much more depending on where you are buying your home and where the tax year falls.
This example used conservative estimates for property taxes, HOA fees, and home insurance, all of which could be higher than the national average.
Work With a Realtor Who is Familiar With Cash Buyers
Every home purchase comes with closing costs that buyers have to include in their budgets. Even if you are a cash buyer, you will have closing costs related to various taxes and fees that made the purchase possible.
Knowing these closing costs ahead of time can help you set a reasonable budget for your home purchase and prepare you to send the right amount to the title company.
One of the best ways to ensure a smooth real estate transaction is to hire a Realtor you can trust. These professionals can explain any complicated terms related to your closing documents and help you overcome hurdles related to the sale. Your real estate agent is one of your best assets when buying a house.
To find an agent you enjoy working with, turn to FastExpert. Find Realtors in your area who are familiar with cash buyers and closing costs in the area. They can create sample closing documents that help you budget your expenses and guide you through what each cost means. Try FastExpert today and see how hiring an agent from our database can streamline the buying process.
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