Homebuyer Education

What are Closing Costs?

Jess Zhao | 19 Jun 2018

When you're preparing to purchase a home, there are a lot of costs to be aware of. At Landed, we talk to our customers all the time about down payments, and how it's very powerful to have a down payment of at least 20%.

But, to buy a home, you'll need other cash on hand as well to cover closing costs. Closing costs are one-time costs associated with closing the transaction. These are paid before you get the keys and close on your new home.

How much are closing costs?

These vary based on where you buy, when you buy, the type of loan you get, what type of home it is, and much more. You typically won't know exactly what these costs are until a few days before you officially close, which makes it very challenging to plan. That said, most Landed homebuyers have found that these fees are about 1% - 2% of the total cost of the home.

What are the different types of closing costs I might pay?

There are many different closing costs – some are extremely predictable while others may be uncertain until shortly before the transaction closes; some are very large while others may be $40-50. Here are a few types of closing costs you might expect to pay:

Transfer Taxes. Transfer taxes are the fees that are paid when a property is transferred from one entity to another. The amount of transfer tax you pay depends on which county and city you live in. Here's an example of the full California schedule.

Pro-rated Fees. There are a number of fees, such as property tax and HOA fees, that will be pro-rated based on when you move into the home. For example, if the previous owner had pre-paid 2 months of property taxes, you would pay for those two months of taxes at closing.

Homeowner’s Insurance. Lenders require homeowners to purchase a homeowners insurance policy to provide financial protection in the case there's damage to the property. You may be required to pay the first year of home insurance premium at closing.

Title/Escrow Fees. The title/escrow company often charges several fees, including the cost of searching your property’s history to determine if anybody has a claim to your property, basic document prep fees, and fees for overseeing and managing the closing process.

Loan fees. This may include the cost of getting your home appraised, and other lender costs. In addition, you may be required to pay your first month of mortgage payment at closing.

Mortgage Points. “Points” are pre-paid interest – one “point” is one percent of the total loan amount. Some homebuyers may choose to pay points in order to secure a lower interest rate.

Inspection Fees. If an inspection report has not been completed recently, it's important that you get a general home inspection report so that you have a clear understanding of the state of the home, and what repairs (if any) will be required.

Title Insurance. Lenders require homeowners to purchase title insurance, which protects the lender, and homeowners from the possibility that the seller does not have free and clear ownership of the property and thus is not able to fully transfer the property to you.

A full estimate of closing costs will be provided after your offer has been accepted on a home. Other costs may apply.

Note that every homebuying situation is different. You should seek advice from licensed professionals before making a decision to purchase a home. Nothing in this blog post is meant to be construed as advice.

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About the Author

Jess Zhao

Jess is Head of Customer Experience at Landed, where she spends her days working with homebuying teachers. You can reach her at jess@landed.com

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