What Are Closing Costs?

You've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to move into your new home. But before you get the key, there's one more step--the closing.

Also called the settlement, the closing is the process of passing ownership of a property from seller to the buyer. And it can be bewildering. As a buyer, you will sign what seems like endless piles of documents and will have to present a sizeable check for the down payment and various closing costs. It's the fees associated with the closing that many times remains a mystery to many buyers who may simply hand over thousands of dollars without really knowing what they are paying for.

As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Here are some common fees:

Appraisal Fee: This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process.  Expect about $400-$500

Title Insurance:  Title insurance covers the buyer in the event that there is a defect on the title after the home has been transferred.  This cost varies depending on the value of the property.  In Santa Clara County this cost is traditionally covered by the seller.  For a million dollar home a seller should expect to pay about $2500.

Title Insurance Lender's Coverage:  The lender will require their own title insurance policy which covers the lender's interest in the property.  This cost is paid by the buyer and depends on the loan amount.  For an $800K loan expect to pay about $1,200.

Loan Processing Fee: This fee covers the lender's loan-processing costs and is generally a percentage of the loan.  A buyer should expect to pay around $1,000-$1,500.

Other Lender Misc Fees: Flood Cert $25, Credit Check Fee $20, Tax Service Fee $90 paid by Buyer.

Other Title Misc Fees: Courier Fees or Delivery Fees $50, Environmental Protection Lien $25, Notary Fees $200 (Depends on the number of signers and loans), Loan Service Fee $300

Loan Discount: You will pay this one-time charge if you have chosen to pay points to lower your interest rate. Each point you purchase equals one percent of the total loan.  This fee is uncommon as most lenders do not charge points unless you want to buy the rate down.

Broker Commissions:  By far the most expensive closing cost of the transaction.  The commissions are almost always covered by the seller from their proceeds.  Commissions can vary by agent and brokerage.  To understand more about commissions see our post on Real Estate Commissions.

Natural Hazard Report and Environmental Report: Required report which is paid for by the Seller, cost is about $125.

Escrow Fees: These fees generally include costs for the title search, title examination, document preparation and other miscellaneous title fees.  This fee is traditionally paid for by the seller in Santa Clara County but there may be some specific fees to the buyer such as the signing fees, loan tie-in fee, and documentation prep for the loan docs.  Buyer's escrow fees to the title company are separate.  Sellers expect to pay around $1500.

Home Warranty:  Home warranties cover certain aspects of the home for one year.  They are not mandatory but typically are requested by buyers.  Sellers sometimes pay or buyers will pay.  Expect to pay anywhere from $300-$600 depending on the features of the home, or if the home as a pool.

PMI Premium: If you buy a home with a low down payment, a lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in their home, however, he or she can normally apply to eliminate this insurance.

Prepaid Interest Fee: This fee covers the interest payment from the date you purchases the home to the date of your first mortgage payment. When you close the lender expects the interest upfront for the first month, then your payment is due at the end of every month once interest has accrued.  Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.  

Proration of Property Taxes:  Property taxes in Santa Clara County are split into two periods or installments.  The first installment and the second installment.  When you close on a property you will pay based on the existing tax roll of the property, which is likely lower than what the tax roll will be when its reassessed based on the new purchase price.  Depending on when you close relative to the beginning or end of the installment period you will be responsible for the cost of the portion that is owed from the point of when ownership is transferred to you to the end of the particular installment period.

Escrow or Impound Accounts for the Lender: In locations where escrow accounts are common, a mortgage lender will usually start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months worth of homeowner's insurance premium will be collected. In addition, taxes equal approximately to two months in excess of the number of months that have elapsed in the year are paid at closing. (If six months have passed, eight months of taxes will be collected.)

Recording Fees: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.  Examples can be $50 for deed recording, $150 for Deed of Trust Recording.

Transfer taxes:  There can be two types of transfer taxes in our area.  County transfer tax which is traditionally paid for by the seller, and city transfer tax which is traditionally split between buyer and seller.  City transfer tax only exists in a few cities in Santa Clara County such as San Jose, Palo Alto, and Mountain View.  County transfer tax is generally a $1.10 per $1,000 in sale price.  City transfer tax is $3.30 per $1,000 in sale price, split between buyer and seller (so $1.65 each).

Homeowners Insurance Premium: Before you close escrow you are going to need a home owner's insurance policy.  This cost will vary depending on the value of the home, where the home is located, and if it is affected by any hazardous areas, as well as the policy and deductibles.  Expect to pay around $1000 a year for a million dollar property.

HOA Fees:  When closing on development or community that has an HOA there may be a transfer fee, HOA docs fee, and the HOA may have the buyer pre-pay the first two months of dues.  The transfer fee will vary by community and is generally paid for by the seller, the docs fee also varies and is also paid for by the seller.

Make sure you consult a real estate professional in your area to find out which fees--and how much--you will be expected to pay during the closing of your prospective home. Keep in mind that some of these costs can be negotiated,  however, tradition generally dictates who pays what.  Understand that lender costs will vary between lenders, make sure to request a copy of the lender costs upfront from your lender.  Costs also may differ slightly between title companies.