Most buyers plan carefully for the down payment and then get a surprise at the end: closing costs. These are the fees and taxes paid to complete the purchase, and they can add a noticeable amount to the cash you need on the day. They vary by state, county, city and lender, so treat this as a general guide and ask your lender for a written estimate early.
The main categories
- Lender fees. If you have a mortgage: origination or underwriting fees, an appraisal, credit reports and sometimes points you choose to pay to lower your rate.
- Title insurance. A lender's policy protects the bank; an owner's policy protects you against problems with the title that were missed in the search.
- Escrow or settlement fees. Paid to the escrow company, title company or attorney who holds the money and documents and makes sure everything is signed and recorded.
- Transfer taxes and recording fees. Charged by the county, and sometimes the city, when ownership changes hands.
- Prepaid items. Property taxes, homeowners insurance and mortgage interest that are paid in advance or into an escrow account.
In California
California counties charge a documentary transfer tax, and some cities add their own on top. San Francisco uses a graduated city rate that rises with the sale price, and the City of Los Angeles has Measure ULA, an extra tax on higher-priced sales. Who pays transfer taxes is a matter of local custom and negotiation. In much of Southern California the seller traditionally pays the county tax, while in parts of Northern California the cost is often split. Your purchase contract will say who pays what, so read that section carefully.
Escrow and title fees are also often split or assigned by local custom, and that custom differs between Northern and Southern California. A buyer in Los Angeles and a buyer in San Francisco buying at the same price can end up with different bills.
California property taxes are generally based on the purchase price, at a base rate of 1% plus local bonds and assessments. After you buy, you will receive a supplemental tax bill for the change in assessed value, which surprises a lot of new owners. Budget for it.
In Florida
Florida charges a documentary stamp tax on the deed, usually paid by the seller, and a separate stamp tax and intangible tax on a new mortgage, usually paid by the buyer. Miami-Dade County has its own rates and, for some property types, an extra surtax.
Title insurance customs also differ by county. In much of Florida the seller usually buys the owner's policy, while in Miami-Dade and a few other counties the buyer often pays. Again, the contract decides, and it is negotiable.
Insurance deserves its own line in a Florida budget. Homeowners insurance and, in many areas, flood insurance can be significant, and lenders will require proof of cover before closing. Get quotes as soon as you have an accepted offer, using the home's inspection reports.
How to estimate your own costs
- Ask your lender for a Loan Estimate as soon as you apply. It lists expected closing costs on a standard form.
- Ask your agent which costs are customarily paid by the buyer in that specific city.
- Get insurance quotes before your inspection contingency ends.
- Expect a Closing Disclosure at least three business days before closing, and compare it line by line with the Loan Estimate.
Ways to reduce what you pay
You can compare lenders and title companies, ask the seller for a credit toward closing costs as part of your offer, or choose a slightly higher interest rate in exchange for lender credits. Each option has trade-offs, and the right one depends on how long you plan to keep the home and the loan.
Whatever you do, do not leave closing costs as an afterthought. When we prepare an offer with you, we include an estimate of your total cash to close, so the number on the day is one you expected.
