Home buyers can expect closing costs in California to average 2% to 3%. There are two types of expenses: one-time (non-recurring) and recurring (pro-rated or ongoing). For example, if you buy a home in Los Angeles for $800,000, your one-time and recurring closing costs would range from $16,000 to $24,000. Here’s how the fees break down:
Non-Recurring Fees
These are the fees that are paid only once.
- Escrow Fees
- Escrow – the fee paid for escrow services
- Title Insurance – a search of the title’s history ensures that the title is free of defects like liens or other encumbrances. The ensuing insurance policy is paid by the buyer/borrower and protects the lender in case of unforeseen issues with the title arise.
- Notary – the cost to verify signatures
- Recording – fee for recording the change of ownership with the county government
Lender Fees
- Mortgage origination – fees paid for originating the loan
- Underwriting – the administrative cost of evaluating the borrower and the property
- Processing – covers the paperwork and deal management
- Flood certification – a risk assessment of the property
- Discount points – fees to “buy down” the current market interest rate on a mortgage
- Mortgage insurance – typically required by lenders when down payments are less than 20% of the purchase price of the home
Recurring or Prorated Fees
Recurring fees are items you can expect over the course of home ownership like property taxes. At closing, some funds are pulled aside to pay the first few installments of these ongoing expenses. This makes for smoother transition for the new home owner while they adjust to a new payment schedule. You may hear the professionals working on your deal use words like “impounds” or “reserves” to refer to the collection of these upfront, prorated fees.
Generally, three months of home insurance and six months of property taxes are collected at closing. The lender collects the money and then disburses it on your behalf each month. This way, you won’t get hit by a big property tax bill all-at-once.
- Prepaid mortgage interest – pays the interest portion of the monthly mortgage payment for the current month
- Property taxes – usually six months of taxes will be held in an impound account
- Hazard insurance – homeowner insurance premium
- HOA dues – enough to cover the first two months