As a homebuyer, it’s easy to get caught up in the excitement of making plans for your new home. But there are some very important transaction details you may have overlooked, such as the countless transaction fees charged to buyers, known as Closing Costs. These costs can add up quickly and catch you by surprise.
What Are Closing Costs?
Closing costs are the fees and expenses you must pay on the day you close on your home. They cover a wide range of services associated with the transaction, including your lender’s origination fees, the appraisal, title search and insurance, escrow fees, recording fees, and prepaid expenses like homeowner’s insurance and property tax. In California, closing costs for buyers typically range from 2% to 5% of the purchase price.
Common Closing Cost Items
Loan origination fee (typically 0.5% to 1% of the loan amount), appraisal fee ($400 to $600), title insurance (varies by purchase price), escrow fees, recording fees, home inspection (often paid before closing), first year homeowner’s insurance premium, and prepaid interest (from closing to end of month). Your lender will provide a Loan Estimate at the start of the process and a Closing Disclosure three days before closing that details every fee.
Who Pays What?
While buyers typically pay the majority of closing costs, sellers also contribute. Sellers usually pay the real estate agent commissions and may agree to cover some buyer closing costs as part of the negotiation. In some markets and situations, buyers ask sellers to contribute to their closing costs as part of the offer — this is called a “seller concession.”
How to Reduce Closing Costs
Shop around for services where you have a choice (title insurance, settlement agents). Negotiate with the seller to cover some of your costs. Ask your lender about no-closing-cost loan options (where costs are rolled into the rate). Compare loan estimates from multiple lenders. Look for down payment assistance programs that also cover closing costs.
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