Weighing Closing Costs of Home Purchase
Congratulations! The seller accepted your offer. You’re well on the way to owning your dream home. Hold-off on breaking out the bubbly for now. You’re not the owner just yet. Rather, you’re in “escrow.” What is escrow anyway? In a California real estate law context, it’s the time period after your offer has been accepted and before you become new owner of the home. During this time, your money is held by a neutral third party until all the necessary documents are finalized. While the purchase price is within your price range, in the haste of beating out competing offers you failed to calculate the closing costs to purchase the home. Closing costs under California real estate law can make or break a real estate transaction, especially considering that the Golden State has the fourth highest closing costs on average in the nation.Understanding the variables in calculating your closing costs and mortgage payments will help you to avoid “sticker shock” by giving you a realistic final figure that you’ll have to fork over to call the real property home.
Nitty Gritty of California Real Estate Law Closing Costs
Many factors influence how much you’ll pay each month. Aside from the amount borrowed and interest rate on your mortgage, there is the duration of the loan (30 year vs 15 year) and amount of downpayment. A downpayment of less than 20 percent of the loan usually requires the homebuyer to pay private mortgage insurance (PMI). PMI protects the lender if the borrower defaults on the loan. Lenders sometimes also require borrowers to advance funds into a special escrow account to cover homeowner’s insurance and/or flood/hazard insurance, property taxes and PMI. The monthly payment into the special escrow account may fluctuate. Financial preparation is paramount to buying and staying current on your mortgage payments. Expect to pay an escrow fee based on the selling price of the home at the close of the deal . In addition to these fees, closing costs under California real estate law are best conceptualized when broken into the following 3 categories.
Costs of Getting Mortgage
Acquiring a mortgage costs money. The costs of getting a mortgage include:
- credit checks
- loan documentation fees
- loan origination fees
- commitment and processing fees
- hazard insurance
- interest prepayments
- lender inspection fees
- notary charges
The amount you pay depends on when you close as these fees are calculated daily and are either prepaid or prorated under current California real estate law.
Ownership Transfer Charges
These charges include title search, title insurance, related legal fees and fees for conducting the settlement. A title search consists of searching the public records to establish that the owner has clear title and that there are no claims of ownership against the property. Lawyers specializing in California real estate law can perform this search as part of their representation. Prepare by allocating a few hundred dollars to cover fees for notary, recording and endorsements.
State & Local Government Charges
Be sure to allocate funds for city, county, and state transfer taxes, recordation fees, and prepaid property taxes. These are the fees involved in handing and recoding the paperwork for your home purchase, as well as your property taxes. A city transfer tax or municipal tax can also be imposed within the corporate limits of some cities. The cost varies and depends on purchase price.
While certain costs are traditionally paid by either the seller or buyer, these terms are negotiable under California real estate law. The parties sometimes agree to allocate closing costs “as custom.” Different counties have different customs so you’ll have to review the local rules. In Santa Clara County, the custom is that the seller pays title insurance, escrow and county transfer taxes, while the city transfer taxes (in San Jose, Palo Alto, and Mountain View only) are split between the parties. The opposite is true In San Mateo County. Consulting a lawyer specializing in California real estate law is key to minimizing costs and having a smooth transaction.