Closing costs

Key Takeaways

• Closing costs are the charges due at settlement on top of the purchase price: loan fees, title and escrow charges, recording fees, and prepaid taxes and insurance.
• Both sides pay closing costs. The buyer's side is dominated by loan and title charges, while the seller's side is dominated by commission, loan payoff, and transfer tax.
• Who pays what is set by the contract, except where a statute assigns a charge. Washington makes the real estate excise tax the obligation of the seller (RCW 82.45.080).
• Prepaid and prorated items are not fees for service. Prepaids fund the buyer's reserves and first interest, and prorations simply divide a shared expense at the closing date.

What It Means

Closing costs are everything a buyer and a seller owe at settlement besides the price of the property, and they fall into four groups. Loan costs are what the lender charges to make the loan, including origination, discount points, and underwriting. Title and escrow costs pay for the title search, the title insurance policies, and the neutral party that closes the file. Government charges cover recording the documents and any transfer tax. Prepaid and reserve items are money collected early, such as the first year of hazard insurance, interest from the closing date to the end of the month, and a cushion of property tax held in reserve.

A buyer sees the numbers twice. They appear first on the Loan Estimate shortly after application and again on the Closing Disclosure before signing, which lets a buyer compare the two documents and question anything that moved.

Sellers pay at closing too, mostly the brokerage commission, the payoff on the existing loan, and the transfer tax. None of it is written as a check. It is netted out of the sale proceeds before the seller is paid.

How It Works in Washington

In Washington, the largest state-specific line on the seller's side is the Real Estate Excise Tax. RCW 82.45.060 taxes the sale of real property at graduated state rates that step up as the selling price rises, with the lowest rate applying to the first portion of the price and higher rates applying to the portions above each threshold, and it taxes qualifying timberland and agricultural land at a flat rate instead. The statute also directs that the thresholds be adjusted periodically, so a broker quotes the current published brackets rather than a number memorized years ago. Local jurisdictions add their own excise tax on top of the state rate. RCW 82.45.080 provides that the tax levied under that chapter is the obligation of the seller, so a contract that says nothing about it still leaves the seller owing it.

Escrow and title charges are the other large block, and in Washington they run through a registered escrow agent or a title company rather than through an attorney. Because the escrow agent handles disbursement, every charge lands on the settlement statement as a debit or a credit to one party. Our guide to preparing for a first closing walks the buyer's side line by line.

Shared expenses are split by date. Property taxes, association dues, and prepaid utilities are handled by Proration, with the seller normally responsible through the closing date and the buyer from that point forward unless the agreement says otherwise.

Example

Rosa buys a Kent townhouse from Dev for $525,000 with a $420,000 conventional loan and a $12,000 earnest money deposit already in escrow. On her closing disclosure, her loan costs are $4,300 for origination and underwriting, her share of title and escrow is $2,150, recording is $310, and prepaid items total $6,240: $3,900 for the first year of hazard insurance, $640 of interest from the closing date to month end, and $1,700 into the property tax reserve.

That is $13,000 in closing costs. Her down payment is $105,000, which is the $525,000 price less the $420,000 loan. Add the two, subtract the $12,000 deposit already credited, and Rosa wires $106,000 to escrow the day before signing.

Dev's side reads differently. His debits are the brokerage commission, the payoff on his existing loan, his half of the escrow fee, the owner's title policy he agreed to buy for Rosa, and the state and local real estate excise tax, which is his obligation by statute. He writes no check at all. The escrow agent subtracts every debit from the $525,000 and wires him the net proceeds.

Common Mistakes and Exam Traps

• Closing costs are separate from the purchase price and are not automatically covered by the loan. A buyer who budgets only for the down payment will come up short at the table.
• Prepaid items are not lender fees. Insurance premiums, prepaid interest, and tax reserves are the buyer's own expenses collected early, not charges for making the loan.
• A seller concession is a credit toward the buyer's closing costs, not a price reduction. The contract price stays where it is and the credit shows up as a settlement statement line.
• In Washington the excise tax is the seller's statutory obligation, so an answer that assigns it to the buyer because the buyer pays most other government charges is wrong.