Both Home Buyers and Sellers have Closing Costs. The Buyer Incurs Costs When They Take out a Loan, Buyers pay The Escrow Company, The Title Insurance, The prepayment of property taxes, Homeowners Insurance and More….
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Thank you for joining me on this episode of the Southern California Real Estate Answer Man. In this show, I am going to explain the term closing costs. What are these closing costs that you are hearing about? What are they comprised of and why are you paying them?
What Are Home Buyer’s Closing Costs?
Well, sellers and buyers pay closing costs but in this episode we are just interested in the closing costs paid by the buyer.
Generally speaking, if you are getting financing, a typical buyer is going to pay approximately 3% of the sale price in closing costs. That is above and beyond the down payment mind you.
So let’s take a home that costs $500,000.
Escrow fees will cost generally $200 plus $1.75-2.00 per 1000 so for a home costing approximately $500,000 the escrow fee will cost about $1,200. Escrow is explained in another episode, but basically what they do is take the Purchase contract, and they create a document called Escrow Instructions, whis is a road map of the path that the agreed upon contract, signed by both parties in the transaction, that the sale of the property will take. The length of the escrow, the down payment, the agreement between seller and buyer about home warranties, the length of time between the close of the sale and the turn over of the keys to the new home, all that is written in the escrow instructions. They hold the money, they take care of sending money. They are a very important part of the process, and we will have an escrow representative come in and talk about all they do in another show. but for now, just keep in mind that the typical fee for a $500,000 home will be approximately $1,200.
You will be paying for Title Insurance. If you are planning on financing the home, the bank will require you pay for Title Insurance. Yes, you are right that the seller should be paying for Title insurance, and they do. They pay to have Title look over their property to make sure, and Insure that the property is free and clear of liens. However as a buyer, the bank wants you to pay title insurance to insure against anything you do to mess up the title for them. So for a home that costs $500,000, that title insurance policy will cost about $1,000.
Prepaid Property Taxes
Another thing you will be paying are property taxes. In Ventura County, property taxes will set you back 1.25 % of the purchase price on an annual basis. During escrow you will be required to pre-pay some of the property tax. It could be as much as 6 months prepaid, so that could be some money, for that $500,000 home that will be $ 3,125. These are recurring costs. For as long as you own that home, you will be paying your property taxes twice a year so you will be paying that $3,125.00 in November, and then again in April. November 1st and April 10th.
Prepay Your Property Insurance
Next you will need to pay your property insurance in advance. That’s for fire and liability and you will be required by the lender to pay that in advance. That policy on a $500,000 home will set a buyer back about $900-$1,200 per year. We are talking about California here and that means Earthquake country. Many of us have Earthquake insurance through the California Earthquake authority. That Earthquake policy will set you back on the half million dollar home, approximately $1,000-$1,500 per year over the regular insurance coverage. Also if you are in a flood zone, you will be asked to pay your flood insurance in advance too, so watch out for that.
Points and Lending Fees
So what is next, well if you are taking out a loan on this property you are going to have to pay fees to the lender and these things they call points. Now, if you are not taking out a loan but are paying in cash, you won’t be paying all these fees, and you won’t have to pay for that Title insurance we were talking about earlier that you have to pay for the bank. So what are these fees and points and how much will those cost you?
The points are a percentage of the money borrowed so lenders are generally going to charge 1-2 points or 1-2 percent of the loan total. Then you will have to pay an appraisal fee of $450-$500, a loan tie-in fee, a credit report fee, a few other fees thrown in. Those will be added to the 1-2 percent you will be paying in “points”.
So let’s say you are financing $400,000 on this $500,000 purchase, you will average approximately $6,000-$7,500 for all of the lender fees.
You will be paying for inspections. A home between 2-2500 square feet will cost between $350-$500 for a full professional home inspection. There are many home inspection companies out there who do nothing but that for a living. You will also be needing a termite company to come and inspect the property to see if there are any of those little critters out there that need tending to. That should run no more than $100. I will be talking with a home inspector and a termite inspector in one of my upcoming episodes of the Southern California Real Estate Answer Man so look for that.
So what other inspections will you be doing that will set you back some money? Well, if the home has a chimney, you may want to spend some money having that individually inspected. You see, a home inspection company may see something wrong with a chimney, but they don’t tell you what an expert would tell you. That expert will charge you around $350 for that inspection. You may want to have the sewer line inspected with a camera to see if it is clogged, damaged or cracked. That inspection will set you back about $350. So we are about at $1,000 for your inspections. The general inspector may suggest that you should have other items looked at more closely like your roof, or your HVAC system, plumbing and the like. Now these things can cost you nothing to have checked over because you are going to have repairmen and craftsmen come in to give you estimates and costs.
Just keep in mind that you have only a small window in most cases to perform your home inspections, so get the inspector in there early, and if they point out an issue that they suggest you consult an expert, you will have time to get that HVAC person, or the plumber, electrician or a roofer in to give you an estimate or their opinion on the cost to remedy the particular issue. Then you can ask for the seller to give a credit for a fix, or if the seller doesn’t want to give you the credit or perform the repair themselves, at least you know how much it will take to make the required repairs. You can walk if it looks like a big problem that you don’t want to deal with, but again, get those inspections done early.
On a home purchase of $500,000 in most of Southern California The following fees are approximate figures associated with costs of buying a home.
- Escrow Fees Approximately $1,200
- Title Fees Approximately $1,000
- Property Taxes Approximately $3,125
- Insurance Approximately $1,200-2,700
- Points and Lending $ 6-$7,000
- Inspections $500-$1,000
So there you have it, As I mentioned at the beginning of this show, the closing costs for a 500,000 home are going to be setting you back approximately 3% of the purchase price or around $15,000.
We can talk about having the seller pay some or all of these closing costs, but that will be another episode of the Southern California Real Estate Answer Man.
If you are buying your home with cash, you will pay about half that amount, like $7,000, maybe even less instead of $15,000. Now that’s a substantial difference but hey, not all buyers can pay cash. But if you can, we will discuss that in another episode as well.
And that is it for this lesson from me, the Real Estate Answer Man. Thank you for listening the whole way through. Stay tuned for and download all of my other podcasts. In the meantime, just visit my website at www.barrykessler.com, or southerncalifornarealestateanswerman.com and see my blogs, listen to my podcasts and watch my YouTube videos.
Remember, I am a real live Real Estate Agent, I work with my wife Debra, also a top producer at Century 21 Troop Real Estate. When you work with us, you get two agents for the price of one. If you are looking to buy or sell a home in Southern California, especially in the San Fernando Valley, Simi Valley Moorpark, Thousand Oaks and Agoura, The Kessler Team is here to represent and serve you with fantastic service, and all of the finest tools in the industry.
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Thanks for listening.
See you in your next home!