A pool in the backyard of a home

    Closing costs are the various fees and charges buyers face when buying a home that are required in order to close on a loan. Closing costs accrue from lenders and third parties 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 pay for your home. These elements include the type of loan you choose, your down payment amount, the property type, and the occupancy type.

    But what are the average closing costs in California? For buyers in California, closing costs typically run between 2% and 5% of the home’s purchase price.

    For example: Average closing costs can range from ~$10,000 on the low end to ~$25,000 on a $500K house in California.

    Closing Costs To Expect For Homebuyers in California

    There are two types of closing costs: Non-recurring and Recurring.

    Non-recurring

    Nonrecurring closing costs include the typical closing costs in California that buyers pay only at the time of purchase.

    These include:

    • Escrow fees: These fees are paid to your escrow company.
    • Title Insurance fee: This fee protects you and your lender against any liens on the home.
    • Recording fee: This fee is charged by the county to record the new Deed of Trust.
    • Transfer taxes: These taxes are charged by the county (or city in some places) that the property falls into. They sometimes are split between buyer and seller.
    • Mortgage origination fees: These fees compensate your lender for any costs to originate the loan.
    • Processing fees: This fee is similar to the underwriting fee, compensating the bank for the time to process/underwrite the loan.
    • Home inspection fee: Typically a home inspection is recommended to better understand what condition the property is in.
    • Appraisal fee: This fee is a payment to the appraiser who assesses the value of the property.
    • Underwriting fee: This fee is associated with the underwriting of the loan.
    • Notary fee: This fee is payable to the notary public in exchange for their services.
    • Credit report acquisition fee: When taking out a mortgage loan, you will pay an acquisition fee for the lender to obtain your credit report.

    Recurring

    Recurring closing costs include any fees that will recur after the purchase of your home closes.

    These include:

    • Prepaid interest: This covers the mortgage interest due the month the loan funds. This fluctuates with the closing date.
    • Property taxes: These taxes cover any property taxes due before the next mortgage payment. They can also include any “prepaid property taxes” used to fund the escrow/impound account.
    • Homeowners insurance: Typically 1 year’s worth of insurance premium is charged upfront. The additional 3 months may be collected to pre-fund an impound/escrow account.
    • HOA dues: Lenders typically must collect 2 months of HOA dues at closing to pay the HOA on your behalf.
    • Mortgage insurance: Depending on the loan type, there may be an upfront fee for mortgage insurance.

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    Many closing costs vary with the price of the home or the loan amount. For example, title insurance, escrow fees, transfer taxes, and loan origination fees usually increase on larger purchase prices.

    Other fees, such as the appraisal fee, underwriting/processing fee, credit report fee, notary fee, and recording fee will likely be fixed regardless of the loan amount or purchase price.

    The largest variants in closing costs in California are property taxes and transfer taxes.

    On average in California, property taxes are ~1.3% of the purchase price per year. For example, a $500K home in Sacramento would typically have annual property taxes of ~$6,500.

    In certain cities in California, taxes can run much higher. For example, in Oakland, annual property taxes are usually ~1.5% of the purchase price, increasing the closing costs for homebuyers in California.

    Closing In California: What Does A Homebuyer Really End Up Paying For Their Home?

    As we mentioned previously, California homebuyers typically pay between 2% and 5% of their home’s purchase price in closing costs. However, more expensive housing markets tend to have closing costs on the higher end.

    Closing Costs Scenario #1

    Let’s say you bought a house in Sacramento, California for $600,000 at the end of the month. You did not pay points to buy a lower rate, have no property tax bill due in the next 2 months, and no escrow/impound accounts. Your closing costs might land ~$12K.

    Closing Costs Scenario #2

    Let’s say you bought a house in Oakland, California for $600,000 at the beginning of the month. You paid 1% in points to get a lower rate, have an upcoming property tax bill due, additional transfer taxes, and established an impound account. Your closing costs might be on the higher end of ~$30K.

    Visit our closing costs calculator to get a sense of where they might land for you.

    Seller, Realtor, and Lender Credits

    In California, the seller, realtor, and lender can all give credits to help lower closing costs for the homebuyer. There are strict legal guidelines that dictate how much each party can contribute.

    One hard and fast rule with seller, realtor, and lender credits is that the total credits cannot exceed the total closing costs. This means that the homeowner’s minimum “cash to close” will be the amount of the down payment.

    The seller, realtor, and lender credits can never be used to lower the down payment.

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    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:

    1. Too little bang for your buck: When using points, you typically only get about a ¼ percent improvement in your rate for buying a point. It would take about four years for you to recoup that point with interest savings.
    2. Changing rates, equity, and life events: No matter how long people expect to keep their loans, we are always amazed by how soon they refinance.
    3. There is a recession in the future.
    4. Unscrupulous lenders: Many lenders try to convince you to pay points for rates that you could have likely obtained at “no points” with a different lender. Unscrupulous lenders convince you that you are paying “discount points” to buy down the rate when really, the lenders are padding their overall commission.
    5. Cash is king: For many of our borrowers, it is simply better to maintain more liquid for various reasons – home improvements, investments, unexpected expenses, etc.

    The one case where we do suggest paying discount points is if there is an additional credit from the seller, realtor, or lender that will not be used.

    Again, total credits cannot exceed total closing costs. So if one (or multiple) parties are interested in giving a credit that exceeds estimated closing costs, you can request a lower interest rate at the cost of points.

    This will increase closing costs so that the extra credit can be used, and you will benefit with a lower rate and monthly payment at no additional cost.

    Refer to our blog, “Is Paying Points Worth It?” for more information.

    How To Reduce Closing Costs

    Homebuyers in California often ask how they can reduce closing costs. Here are a few recommended ways to decrease closing costs for California homebuyers:

    1. Look for homes in cities with lower transfer taxes.
    2. Consider the closing timeline: If possible, request to close toward the end of the month to lower pre-paid interest.
    3. Do not pay points to lower the interest rate.
    4. Be wary of lenders charging origination fees.
    5. If possible, opt out of establishing an impound account.

    The Bottom Line

    Closing costs typically run between 2% and 5% of the home’s purchase price for homebuyers in California. However, many closing costs vary with the price of the home or the loan amount.

    JVM doesn’t recommend paying discount points to lower your interest rate, but there are several other ways to decrease closing costs.

    Have questions? Schedule a time to chat with one of our expert Client Advisors today.

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