Knowing your closing costs may determine the affordability of a purchase
and influence the type and terms of the loan you choose.
Although certain closing cost items will be the same for two transactions at the same price and with the same loan amount, others may be very different. Below are some guidelines for estimating what your closing costs might be. Once you have chosen a lender and have identified a property, the lender can generate an estimate of fees which will be very accurate.
GUIDELINES FOR ESTIMATING CLOSING COSTS:
Escrow and title fees
In Northern California, escrow services and title insurance are customarily handled by the same company; the two largest are Old Republic Title and First American Title. These companies are required by law to publish their fees for escrow services and title insurance, and these vary only slightly from company to company. Additionally, these companies will charge a signing or notary fee, as well as the fees for recording certain documents with the county. The table below will give you an idea of the escrow and title fees, including signing and recordation, you might pay at different purchase prices – these are estimates:
Your lender can tell you exactly what the fees will be for your situation. These will include a fee that encompasses processing and underwriting, and an appraisal. If you are not yet working with a lender and want to estimate what your lender fees might be, use $1600 for processing/underwriting and $500 for an appraisal up to $1 million, $750 for appraisals over $1 million. Again these are estimates. You may also pay a charge or ‘points’ to lower your interest rate, or choose to pay a higher interest rate and get a credit back from the lender to defray some or all of your closing costs.
In addition to escrow/title fees and lender fees, here is a list of the other major items that you may have to pay at close of escrow:
Mortgage payments, unlike rent, are paid in arrears, or after the fact. This means that your May 1 mortgage payment covers your mortgage cost for the month of April. If you are purchasing a property, and you close on April 10, your first payment on your new loan would not be due until June 1 – no mortgage payment on May 1 – and that June 1 payment would cover your mortgage expense for the month of May. You would, however, owe the interest on your new mortgage for the 20 days in April during which you own the property, and this would be charged in escrow. Prepaid interest can vary dramatically depending on when during the month you close. For example, a $600,000 mortgage at 5.00% would have a daily interest charge of about $85.00. If you closed on April 10, your 20 days of prepaid interest would be about $1700; however, if you close on April 29, you would only owe two days of prepaid interest, or about $170.
You will have to pay for one year of homeowner’s insurance at close of escrow. Getting this insurance is your responsibility, and you will need to have chosen a policy either before or within a few days of having your offer accepted. Your real estate agent and/or your lender will have suggestions for you if you don’t have an insurance agent identified. Here is a formula for a rough estimate of the annual cost of homeowner’s insurance in the bay area: for a purchase price up to $750,000 use $1,500, and add another $300 per year to that for each additional $250k in purchase price.
Although the approximate total annual property tax for any residential property can be figured quickly – 1.25% times the purchase price – the amount of property tax you might pay at closing, if any, cannot be estimated until you are in contract on a specific property. The difficulty in estimating the property tax one might have to pay, or get a credit for, at close is the result of two things. First, property tax installments become due during a fiscal year which begins on July 1, and when during the fiscal year you close escrow determines the amount you either pay or are credited for. Second, any property tax due at close of escrow will be based on the seller’s tax assessment, which may be much lower than yours will be, since yours will be based on the new purchase price. After you are in contract, your lender will be able to tell you if you will have to pay any property tax at the close of escrow. The components of a property tax bill on a specific property may include local, regional, or state bond issues and assessments. Your escrow officer will be able to explain your property tax bill in more detail at the time you sign closing documents. Detailed info on property taxes in California can be found here.
In certain localities in California it is customary for the seller to pay the transfer tax; in other areas the buyer pays transfer tax, or it may be split 50/50 with the seller. Your real estate agent will know what is usual and customary for the area in which you are purchasing your home, and, if you are the one paying it, how much it will be.
You will have the option of paying your property taxes and homeowner’s insurance each month with your mortgage payment, called ‘impounds’. Example: monthly mortgage payment $2500; annual property taxes $6,000 = $500 per month; annual homeowner’s insurance $1200 = $100 per month. Total monthly payment with impounds $3100 ($2500+$500+$100). If you choose to have impounds, the lender will pay the insurance premium annually and the property taxes semi-annually on your behalf. The portion of your monthly payment going toward your insurance premium and property taxes will be put into a strictly regulated interest-bearing escrow account by your lender. At closing you will fund this escrow account by paying into it two months of homeowner’s insurance premium. You will also pay from two to five months of property taxes into the escrow account, depending on when during the fiscal year you are closing. At the time you go into contract, If you opt for impounds your lender will be able to tell you exactly how much you will have to pay into the escrow account at closing.