Average Closing Costs for Home Buyers in California
Closing costs are the various fees and charges buyers face when purchasing a new home. Closing costs can accrue from lenders and third parties that are involved in your loan transaction such as escrow, home appraisers, and title companies.
There are some fundamental elements that contribute to the total amount of closing costs you will have to pay for your home purchase. These elements include the type of loan you choose, your down payment amount, the property type, and occupancy type.
Home buyers in California can typically expect to pay closing costs between 2% and 3% of their home’s purchase price, depending on price, discount points, transfer taxes and other factors. This is an approximation. Most lenders ask that potential borrowers apply for a loan before receiving an exact breakdown of the closing costs they can expect to pay.
There are two types of closing costs: Nonrecurring and Recurring.
Nonrecurring closing costs include the one-time fees that buyers pay only at the time of purchase. These can include:
- Escrow fees
- Title Insurance fee
- Appraisal fee
- Underwriting fee
- Notary fee
- Recording fee
- Transfer taxes
- Credit report acquisition fees
- Mortgage origination fees
- Processing fees
Recurring closing costs include any fees that will recur after the purchase of your home closes. These can include:
- Prepaid interest
- Property taxes
- Hazard insurance
- HOA dues
These are some of the closing costs that California homebuyers may experience. Depending on your own homebuying situation, you may have additional costs. In some cases, these fees may not apply to your closing costs.
Closing in California: What Does a Homebuyer Really End Up Paying For Their Home?
As we explained at the beginning of this blog, California homebuyers typically pay between 2% and 3% of their home’s purchase price in closing costs. This can give you an idea of what you might pay when buying a new home in California.
For example, if you bought a new home in Sacramento, California for $600,000, your recurring and nonrecurring closing costs would approximately be between $12,000 to $18,000.
Should You Pay Discount Points?
Discount points can be used to “buy down” an interest rate which can affect how much you’ll pay in closing costs.
At JVM, we don’t recommend you use discount points for a few reasons.
- Too Little Bang for the Buck. When using points, borrowers typically only get about a ¼ percent improvement in their rate for buying a point. It would take about four years for the borrower to recoup that point with interest savings. This can take even longer if you only focus on the savings from the resulting lower mortgage payment.
- Changing Rates, Changing Equity and Life Events. No matter how long people expect to keep their loans, we are always amazed by how soon they refinance. People refinance because:
- Rates fall sooner than expected
- The equity in their home increases and they want to cash out and get rid of their Mortgage Insurance
- Life happens. People get new jobs, families grow, and housing needs change.
- There is a Recession in the Future. Many economists and hedge fund managers predict a recession after 2020. When recessions hit the economy, the Federal Reserve lowers its rates. When rates fall, most borrowers who have obtained loans in recent years will likely be able to refinance at no cost.
- Unscrupulous Lenders. Many lenders try to convince borrowers to pay points for rates that they could have likely obtained at “no points” with a different lender. Unscrupulous lenders convince borrows that they are paying “discount points” to buy down the rate when really, the lenders are padding their overall commission.
- Cash Is King. It requires more cash to pay points. For many of our borrowers, cash is all too tight in the first place. It is simply better to remain more liquid for a variety of reasons – home improvements, investments, unexpected expenses, etc.
To read more about why we advise against points, check out Jay’s blog.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646