Closing costs are the expenses associated with purchasing a home. The buyer pays these fees, which typically include an origination fee and a title search fee. They may also cover other closing costs, such as attorney’s fees, transfer taxes, and interest charges on loans from the date of purchase to settlement or closing day. When you apply for a mortgage loan, your lender will provide you with an estimate of what your total closing costs might be. This can help you plan financially before taking out a mortgage loan.
Generally, Closing costs in California are expected to range between 2% and 3%. There are two types of expenses: one-time (non-recurring) and recurring (pro-rated or ongoing). For example, if you spend $800,000 on a home in Los Angeles, your past and recurring closing costs will range from $16,000 to $24,000.
In addition to these up-front fees that buyers pay at settlement or close of escrow, there may be ongoing monthly obligations arising from this transaction, such as property taxes and homeowner’s insurance. These are in addition to the monthly principal and interest payment you will make on your mortgage loan. You should also budget for moving expenses if you are relocating to be closer to your new home.
What are Closing Costs?
Closing costs are the fees and expenses associated with purchasing a home. The buyer usually pays these fees, which typically cover an origination fee and a title search fee. They may also include other closing costs such as attorney’s fees, transfer taxes, and interest charges on loan from the date of purchase to settlement or closing day.
When you apply for a mortgage loan, your lender will provide you with an estimate of what your total closing costs might be. This can help you plan financially before taking out a mortgage loan.
Apart from the up-front fees buyers pay at settlement or close of escrow, there may also be ongoing monthly obligations arising from this transaction, such as property taxes and homeowner’s insurance.
These are in addition to the monthly principal and interest payment you will make on your mortgage loan. In some cases, individuals may have to pay a one-time community fee when they move into their new home sponsored by the HOA or condo association for that community. You should also budget for moving expenses if you are relocating to be closer to your new home.
Closing costs can vary depending on several factors, including what type of property you buy, where you buy it from, whether or not you have a mortgage loan pre-approval letter from a lender, and what kind of loans you have available to you. Your real estate agent should provide an estimate along with the purchase agreement or offer to purchase, though these should be used as a guide only.
You can also request a closing cost estimate from your lender. Keep in mind that it’s likely you will face additional costs when moving into your new home, such as utility hook-up fees, appliance installation or repair, and hiring professional cleaners.
Costs involved in closing a deal
In a purchase transaction, the settlement costs typically include an origination fee and a title search fee. They may also cover attorney’s fees, transfer taxes, and interest charges on loans from the date of purchase to settlement or closing day. Closing costs can vary depending on the number as mentioned above.
In addition to these upfront fees that buyers pay at settlement or close of escrow, there may also be ongoing monthly obligations arising from this transaction, such as property taxes and homeowner’s insurance. These are in addition to the monthly principal and interest payment you will make on your mortgage loan.
In some cases, individuals may have to pay a one-time community fee when they move into their new home sponsored by the HOA or condo association for the particular community. You should also budget for moving expenses if you are relocating to be closer to your new home.
Other costs associated with this transaction can include:
- Title insurance premiums.
- Appraisal fees and credit report charge – If you take out a mortgage, your lender will order an appraisal of the property from a professional appraiser who estimates its worth based on comparable properties in the same area. This estimate often costs several hundred dollars depending on how big your loan is, where you live, and whether or not there was a recent sale of a comparable property nearby.
- Inspection fees – You can have a home inspection to reveal the actual condition of a potential purchase, which may uncover problems with your new home’s structure or general state. This could alter your buying decision and may also affect the price you pay for it if repairs are needed. If you do buy, these repair costs will be reflected in your closing costs when they’re added to your loan amount at settlement.
- Lender’s title insurance – If your lender requires you to obtain their title insurance policy instead of the one you receive yourself from an independent agency or company, then there will typically be additional fees that go along with that service. In addition, your lender’s coverage protects them if someone challenges ownership rights in a court of law.
- Document preparation – You will have various documents to sign to finalize your purchase, including the mortgage loan papers and home purchase agreement. This fee covers the cost of preparing these documents.
Recurring fees in California
In California, there are several costs to keep in mind as you move forward. First, you can expect that your real estate agent will receive a commission. State law requires that all sellers pay a standard commission to their real estate agents, usually around 5% of the purchase price. This is paid for by adding this amount to the final sales price and becoming part of the contract between buyer and seller.
Second, the cost of recording your deed can vary depending on where it is registered but averages about $50-$75 per transaction. Finally, title insurance premiums are typically 0.5%-1% of the purchase price or loan amount (whichever is greater); this fee covers the lender’s title policy which ensures they’ll be paid if someone challenges ownership rights in court.
You will also pay a state transfer tax when you file the deed. This is currently $ .70 per $1,000 in property value and may vary depending on where you live. For example, San Francisco levies an additional $2 fee for every $500 in assessed home value after $250,000.
You will pay recording fees when you file your paperwork to finalize the deed, typically around $10-$15 per page of documents filed. These can total up to several hundred dollars if there are many pages involved or if your property is large (such as acreage).
Before your mortgage approves your loan, they’ll require an appraisal of the property to assure they are protected financially if you default on your loan. They’ll also run a lien search to ensure no liens, judgments, or other hurdles could be filed against the property after you buy it. These fees vary depending on the size and value of your loan but typically average about $400 for each.
Owner’s title insurance
If you’re purchasing owner’s title insurance instead of having your lender provide it, you can expect higher premiums that may total around 2% of the purchase price.
Non-Recurring Fees in California
California fees are of particular note because of the high home prices in the state. As a result, you can expect non-recurring closing costs to be higher than in most states.
For example, you might pay $1,200 for an appraisal; on-time settlement fees of around $700; title search and insurance costs at about $2,500; recording fees totaling about $800; transfer taxes which could exceed $3,000 (if your purchase price or loan amount is over $2 million); and (for the first time home buyers only) a First-Time Homebuyer Credit Deposit which is equal to 1/10th of the total closing costs.
Fees for Sellers
Closing costs are typically paid by the seller when they sell their home, but there may be additional factors that influence how much you’ll pay as well. For example, if your sale is contingent on someone buying your house, you might need to cover any mortgage payments that come due between now and settlement. Your real estate agent will often help you determine what these costs could be so you’re prepared for them.
In some cases, the seller might ask for a small amount of money to be held in escrow while the buyer accumulates enough money to cover their closing costs. If you agree to this, your real estate agent will add a deposit and fee (typically around $500), passed on to local governments and charities like schools and fire departments.
Lender’s Origination Fee
The lender who provides you with your mortgage loan should cover all closing costs; however, specific fees may not be included, such as the lender’s origination fee (which covers administrative costs). This should also be reflected in your monthly payment, but if not, it might be covered by a “Lender Credit.”
Title Company Fees
Lenders will typically use a title company to process the closing of your loan and other paperwork. They may also want this company to provide you with a temporary homeowner’s insurance policy during the time between when they approve your loan and when it is closed. Again, you’ll need to check with your lender to see if these fees are included in your costs or if you’ll be requiring an additional payment from yourself.
In some cases, buyers might ask for a repair escrow agreement where funds are held back from their purchase price until any repairs indicated on the home inspection report have been completed. This could increase how much money you put down at the close of escrow if needed, but it can be a great way to ensure you have the necessary funds for repairs after your purchase.
How to Keep Your Closing Costs Low
Try not to let any of these fees get out of hand. In some cases, you might be able to negotiate with your seller or lender as part of your overall contract offer on the property. For example, you might ask them if they’ll pay some or all of your closing costs in exchange for a higher sales price or lower interest rate on a loan.
You can also consider getting pre-approved for a mortgage before you begin looking at homes so that you know exactly how much money you need and can find one within those parameters instead of going over budget. Or simply put it down upfront, which will reduce the number of closing costs you’ll need to pay.
Closing Costs Aren’t Set in Stone
Don’t assume that your closing costs are set in stone either. You can pay them all upfront or ask for an “adjustment period” where you spread the total fees out over time (usually one, two, three, four years). Either way, make sure you understand how much you will be expected to pay and when because there could be penalties if they aren’t paid off on time by your lender.