X

    X

    Everything to Know About Closing Costs in California

    Closing costs of real estate
    Before home buyers reach the end of their real estate journey, there are service fees and local taxes that need to be paid. Collectively, these are called closing costs and buyers should be aware of them as these fees can drive up the true cost of a home purchase.
    Closing costs are necessary in completing a real estate transaction — from finalizing a mortgage and paying all property taxes and fees to updating real estate records and complying with escrow requirements.
    There’s no standard schedule of fees that applies nationwide. Therefore, it’s incumbent upon buyers to understand the closing costs that are charged in a particular market. This is where the services of a local Realtor or agent becomes key. These professionals can help buyers navigate the intricacies of local fees, state requirements, and other concerns.
    This blog will cover everything that buyers need to know about closing costs in California.

    California closing costs: The basics

    Closing costs in California are often 0.90% to 1.15% of the total home purchase price. In 2020, average closing costs amounted to $6,878.85 (with taxes), according to mortgage company ClosingCorp. This is slightly higher compared to the national average, which is $6,087.

    Who pays for closing costs in California?

    In general, buyers and sellers share payment of closing costs. However, buyers shoulder a larger number of the fees, particularly if there are financing fees to be paid. Whilst escrow fees are paid by both the buyer and seller, this is split with each paying their own share.
    Below is a bird’s-eye-view of the fees that buyers need to account for:

    • Loan origination fee
    • Loan discount points (optional)
    • Credit report
    • Mortgage insurance
    • Prorated property taxes
    • Mello-Roos taxes (depends on location)
    • Home inspection fee
    • Appraisal fee
    • Title search
    • Title insurance
    • Recording fee
    • Surveying fee
    • Settlement fee
    • Escrow fee (buyers side)
    • Deed of trust or mortgage recording
    • Archive and courier fee
    • Flood certification
    • Homeowners’ insurance
    • Prorated condo or homeowners’ association fees
    • Closing attorney

    Sellers on the other hand usually pay a fewer number of fees but may pay a higher total amount depending on property taxes and agent commissions.
    Sellers can expect to cover:

    • Courier and wire transfer fees
    • Mortgage payoff
    • Home warranty fee (varies)
    • Prorated property taxes
    • Transfer tax
    • Documentation fees
    • Recording fees
    • Prorated condo or homeowners’ association fees
    • Escrow fee (seller side)
    • Own closing attorney
    • Broker fees

    To better understand the purpose of some major closing cost line items, it helps to segment these expenses into the following clusters:

    Home loan fees

    • Mortgage broker fees – Those working with a broker in finding a suitable home loan will have to pay broker fees. Broker fees range from as low as 0.5% to nearly 3% of the total home purchase price.
    • Loan origination fee – A lender charges this fee when underwriting a mortgage loan. This fee is usually an additional 0.5% of the total loan amount. So for a $1,000,000 mortgage loan, a $5,000 origination fee will be charged to evaluate and prepare the loan.
    • Application fee – Some lenders will charge this fee when processing a new request for a loan. There’s no set amount and the size of the fee depends on the amount of work that needs to be done (e.g. credit checks, other administrative tasks).
    • Closing attorney’s fees – While California doesn’t require a real estate attorney to be present during closing, the complex process can be difficult to navigate. Buyers should budget for the number of hours they expect an attorney to work in closing the deal.
    • Discount points – This is an optional fee for buyers. Paying discount points decreases the loan’s interest rate. One point is equal to 1% of the loan amount. For example, to take advantage of a discount point on $1,000,0000 loan, $10,000 would need to be paid upfront.
    • Prepaid interest – The majority of lenders usually collect prepaid interest upon closing. The exact amount will depend on the size of the loan. Prepaid interest is calculated from the settlement date to first monthly payment due date.

    Property fees

    • Appraisal fee – The value of the property must first be determined before a lender signs off on a loan. This is one way for lenders to see if the property value is commensurate with the requested loan amount. The services of professional appraisers usually cost $300 or more.
    • Home inspection fee – Lenders also typically require home inspections, which cost between $300 and $800. If the home is not up to safety and structural standards, buyers can negotiate for a lower price. Ultimately, it’s up to the buyer and seller to come to an agreement on how to remedy any existing problems.

    Title fees

    • Search fee – Title searches are carried out to verify if the seller does indeed own the property and that there are no existing claims or liens against it. The exact cost depends on the title company and the region. If there are no digital records of the title, it may cost more and take more time to process.
    • Title insurance for owners – This protects the buyer from the financial ramifications of an error in the title search (e.g. a third party challenges property ownership after the sale). Insurance coverage lasts throughout ownership and even protects heirs or successors to the property. While title insurance is optional, major ownership issues can be avoided down the line if buyers opt for this insurance.
    • Title insurance for lenders – This type of insurance specifically protects the bank providing the loan. In California, buyers are usually responsible for paying this. Insurance coverage lasts throughout the loan term.

    Taxes, insurance, other property-related fees

    • Property tax (city and county level) – At closing, it’s standard practice to pay a few months’ worth of taxes. This gives the new owner some time to adjust to a new tax payment schedule.
    • Mello-Roos taxes – In California, if a property is located in a Mello-Roos Community Facilities District (CFD), a special tax fee is charged. A CFD is an area that receives additional public financing via the sale of bonds to pursue public projects or services. Schools, parks, and health services are common projects that receive funding from Mello-Roos taxes.
    • Condo or HOA fees – Similar to property taxes, upfront payment for the first few months is made at closing. This amount is prorated and may credit the seller for any advance payments made prior to the sale.
    • Homeowners’ insurance – Buyers are usually required to get insurance prior to the settlement date. This is particularly essential for properties that are in close proximity to potential flooding or fire hazards. About three months of home insurance is typically collected at closing.
    • Mortgage insurance fees – This usually applies to transactions where the down payment made is less than 20%. In such cases, lenders will ask buyers to acquire private mortgage insurance, which solely insures the lender (not the home) in case of default.

    Key pointers when closing on a California home

    Business Partners

    Where are upfront payments kept?

    Advance payments for property taxes, earnest money deposit, other fees, and key documents are held by an escrow company. An escrow company is a neutral party that is tasked with holding on to closing costs until the conditions of the purchase contract are fulfilled. This closing phase is also called the escrow process.
    To protect the interests of both buyer and seller, state-mandated rules and regulations are in place to enforce the neutrality of escrow companies in all real estate transactions. In exchange for their services, corresponding fees are paid to escrow companies and it is usually covered by the seller.

    Is it worth paying discount points?

    In general, discount points pay off when buyers plan to stay in a home long-term. With lower monthly payments, the loan becomes more manageable. Those that have extra money and prefer the upfront tax deduction will also benefit from discount points. Additionally, buyers who can’t access the lowest interest rates can purchase discount points to make the loan terms more favorable.
    But “buying” a lower interest rate may not be worthwhile for those planning for a short-term stay. This is because paying for discount points is essentially increasing the upfront costs of the loan. It will usually take five or more years to recover these costs. Moreover, some buyers may be better off making larger down payments to get a head start on building home equity.

    How do homeowners benefit from Mello-Roos taxes?

    It depends on what public projects or services that a homeowner in a Mello-Roos CFD values.
    For instance, take a newly-wed couple planning to start a family. Their children could later reap the benefits of paying additional fees for the local school district. On the other hand, homeowners who are young professionals who don’t have, or plan to have children in the near future may not see the value in this. Instead they may benefit more from improved public transport and infrastructure.
    Other homeowner priorities may include access to well-maintained public parks, better roads, updated health facilities, well-equipped police and fire departments, etc.
    Some buyers may be hesitant to purchase property located in a Mello-Roos CFD since this is basically another layer of taxation. And not all homeowners may feel that they’re getting their money’s worth by paying this additional tax assessment.
    Still, the prospect of paying Mello-Roos taxes is rarely a deal breaker for buyers. More pressing factors normally outweigh any excessive focus on Mello-Roos, such as: stellar home location, secure and friendly neighborhood, traffic situation, accessibility to a variety of amenities, and plenty of green space.

    Do buyers and sellers need to meet in person at the closing table?

    In California, it’s not required for buyers and sellers to face each other at the closing table. For those who are concerned about the COVID-19 situation in the country, this will come as a relief. In most scenarios, agents and brokers can be tasked with ironing out the details and remaining concerns on behalf of clients.

    Is a final walkthrough essential?

    The final walkthrough is the last opportunity to examine the property before officially signing off on closing papers. Buyers shouldn’t skip this to ensure that requested repairs have been made and that the house has seen no further damage since the last home inspection. This is also a chance to do a final review on the purchase agreement terms and confirm that no problematic provisions have been added.

    A quick overview of the California housing market

    As of June 2021, the housing market in California continues its hot streak. The California Association of Realtors saw median home prices reach over $819,000 statewide. Prices continue to soar in sought-after regions like Los Angeles County, where the median home price is well above $900,000.
    Limited housing inventory and relatively low rates continue to be key factors as the real estate industry reaches the midway point of 2021. These trends are fuelling a seller’s market. Naturally, more people are incentivized to put up their homes for sale during this time. However, it would be a mistake to think that buyers would be mostly on the losing end.
    When working with an established Realtor like Ben Kruger, both buyers and sellers can effectively navigate the evolving real estate market and find the best deal possible. Ben has immense success and deep knowledge in the Los Angeles luxury market.

    What makes California endlessly alluring to home buyers

    Despite the unrelenting increase of real estate prices in the past few months, many home buyers remain steadfast in their home search within the Golden State. The continued popularity of the region can be put down to:

    • Ideal weather conditions – Several places in California enjoy what could be described as Mediterranean weather throughout the year. This is especially true for places located in Southern California (e.g. Los Angeles, San Diego), where sunshine can be expected for over 250 days every year on average. Winters are also not as severe and heavy rainfall is infrequent.
    • Abundant career opportunities – Several Fortune 500 companies, big movie studios, and promising startups are headquartered in California. From Tesla and Apple to Disney and Universal Studios, professionals have an array of high-paying and fulfilling jobs they can pursue here.
    • A continuously evolving cultural mecca – Los Angeles and its massive entertainment industry are some of the things that immediately come to mind when thinking about California. And for good reason. Creative titans and influential storytellers are frequently drawn to California’s energetic and diverse communities — a potent source for inspiration for the next big story or cinematic universe.
    • World-class education – California is also a great place for families. Many of the state’s school districts are rated exceedingly high in education rankings. The state is home to some of the most prestigious institutions in the field of education, and includes the University of California Los Angeles, Stanford University, Mission San Jose High, and Harvard-Westlake School.

    Moving to California? Get in touch with Ben Kruger

    California

    For more detailed information on closing costs in California or about the home buying process in general, contact seasoned Realtor, Ben Kruger.
    Ben has been representing the interests of buyers and sellers in the L.A. luxury market for over 15 years. But what sets him apart from many professionals in the industry is his deep desire to set clients on a path towards long-term financial success.
    With a refined and client-focused approach, Ben Kruger can craft a tailored strategy to help clients achieve their real estate goals.

    What do Ben Kruger’s clients say?

    “Ben was always one step ahead of everyone. He spotted inaccuracies in the paperwork that even specialist companies missed. Extremely knowledgeable and responsive.”
    – Katryce S. (Los Angeles)
    “Ben helped us sell our home before our cross-country move. He provided expertise and advice without steering us in any particular direction. Ultimately, we made the right decisions ourselves but we wouldn’t have arrived at those options without Ben’s guidance.”
    – Justin J. (Los Angeles)
    “Ben helped me find the right home in the right neighborhood for the right price. He was so patient and cautioned me about making unreasonable offers when I fell too quickly for overpriced homes. He was always on my side.
    – Letizia S. (West Hollywood)
    You can contact Ben Kruger at 310.600.4500 or send an email to ben(at)hiltonhyland(dotted)com

    References

    The basics on closing costs:
    https://www.businessinsider.com/personal-finance/average-closing-costs
    https://www.nerdwallet.com/article/mortgages/closing-costs-mortgage-fees-explained
    https://www.finder.com/mortgages/closing-costs-in-california
    https://www.rubyhome.com/blog/closing-costs-california/
    https://www.ecentralcu.org/resources/california-mortgage-closing-costs-explained
    Mello-Roos:
    https://www.pointequity.com/blog/what-is-mello-roos-understand-before-you-buy-a-house
    https://www.investopedia.com/terms/m/melloroos.asp
    General tips on closing and closing costs:

    https://www.nytimes.com/2021/02/19/realestate/a-quick-guide-to-closing-costs.html
    https://www.investopedia.com/articles/mortgages-real-estate/10/closing-home-process.asp

    Get In Touch