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Understanding Real Estate Closing Costs

Real estate closing costs often take buyers by surprise because they are uninformed regarding the extent and source of these costs.  Generally, closing costs are around or under ½ of a percent of the total purchase price, excluding any points the buyer may be paying on their loan.  Thus, on a million dollar purchase price expect to pay approximately $5,000 in closing costs if you did not pay for points on your loan.
This article examines the typical closing costs a buyer is expected to pay.  This article first discusses which closing costs vary and then which closing costs are generally fixed.
I. Variable Closing Costs
A.  City Transfer Taxes
Transfer taxes, which can be a large factor in closing costs, vary depending upon what city the property is
located. Three cities in Santa Clara County have city transfer taxes – Palo Alto, Mountain View and San Jose.
The transfer tax, of $3,300 per million in all three cities, is evenly split by the buyer and seller.  Thus, if you are
purchasing a home in one of these cities, buyers will owe $1,650 in city transfer tax on a million dollar purchase.
In San Mateo County the only city with a transfer tax is San Mateo, which is at a rate of $5,000 per million and is
also split evenly. All counties have a transfer tax of $1,100 per million, but this cost is entirely paid for by the
B.  Title Insurance and Escrow Fees
Before the allure of not paying for a city transfer tax has you redirecting your home search to San Mateo County, realize that buyers pay more title insurance in San Mateo County versus if the home was in Santa Clara County.  The difference is that in Santa Clara County the norm is that the seller pays for the buyer’s title insurance and the buyer only pays for the lender’s title insurance.  Conversely, in San Mateo County, the buyer pays for the buyer’s primary title insurance policy as well as the lenders.  
For a million dollar purchase in Santa Clara County, title fees will be approximately $970, versus approximately $3,700 in San Mateo County.  These fees do not vary much dependent upon which title company is chosen because the rates are regulated by the state of California.  Of course, the savings you get in Santa Clara County will be paid for later when you are a seller and then must pay for the buyer’s title insurance policy.
C.   Points on Your Loan
The variable with the greatest effect upon the magnitude of your closing costs are points on your loan.  A point, or 1% of your loan (for example $10,000 on a $1,000,000 loan) is used to buy down your interest rate.  For example, a 30 year fixed mortgage may be at 5.75% with no points or 5.5% with one point or 5.25% with two points.  (Points are viewed by the government as prepaid interest and consequently are deductible from your state and federal income tax just as your mortgage interest is.) 
Points are deductible in the year they were purchased.  Thus, if during either January or December 2009 you paid a point for your loan, the full amount of that point is deductible from your taxes in 2009.  Note that while points are tax-deductible for purchases, for refinances the deductibility of the points is spread out over the life of the loan.  See your tax advisor for more details.  Whether points are a good value for you depends upon how long of a period it takes in interest savings for you to recoup their cost and how long you stay in the home.  For example, if 1 point brings your rate down ¼ of a percent,  then it takes 4 years to recover the costs (let’s ignore discounting future savings due to potential inflation to keep the math simple).  With a 4 year recovery period, it would be a wise investment if you will stay in the home for 30 years but a poor one if you sell or refi in 2 years.  I love in assisting in the analysis of whether points are a good buy or not if you would like.
The interest that you pay on your mortgage is tax deductible on both your federal and state taxes.  This includes some interest that you will pre-pay at the closing for your first month of ownership.  Your lender will send a yearly total of the amount of deductible interest to you at the end of each year.
D.   Other Lender Fees
The closing costs associated with a mortgage can vary by a great deal and when choosing a loan these fees should be scrutinized as heavily as the mortgage rate.  Some lenders will have a lot of “junk fees” such as an underwriting fee, review fee, etc. I recommend lenders who have low closing costs, thus when you hear their rate you know that there are no hidden surprises.  Other fees, such as an appraisal fee, generally range from $400-$450 for a million dollar purchase.  Overall, fees from a lender should not exceed $1,500 on a million dollar loan, excluding any fees you pay for points.
E.    Property Taxes
Property tax is prorated, in that the seller pays the property tax while they own the property (including while it is in escrow) and the buyer pays the property tax once the property is transferred after escrow closes.  Whether property tax is a debit and increases your closing costs or is a credit and reduces your closing costs depends upon what time of year your home is bought and whether the seller has paid her upcoming property tax bill. 
II. Non-Variable Closing Costs
Certain closing costs do not vary depending upon the location of the property or what lender you chose, although these costs can change depending on the circumstances mentioned below.
A)  Homeowners Insurance
A typical homeowners policy will be about $1000, more with a very low deductible and less with a higher deductible.  Generally, your best rates will come from the same company that provides your auto insurance for they provide savings when insuring multiple assets.  You generally pay for your first year insurance policy in escrow, but can pay the insurance company directly if desired.  I will be getting you homeowners insurance quotes once we are in escrow.
B)  Homeowners Association Dues (“HOA” dues)
HOA dues, which are only paid for condos and town homes, generally run between $250-$500 a month.  You pay in advance for your first one or two months of HOA dues in escrow. 
C) Recording, Notary, Wiring and Document Preparation Fees;
These various fees from the title company generally total about $300.
To summarize, closing costs for your purchase in Santa Clara County should be about 1/2% of your purchase price, or $5,000 on a million dollar purchase, excluding lenders’ points.  These fees will be slightly higher if your home is in San Mateo County, for then buyers pay for more in title fees, which outweighs the savings in city transfer taxes. Lenders points can quickly increase this amount, but they are an option to consider if you want to increase your tax deductions for that year.
Note that as your buyer’s agent I will always be trying to get you the best deal possible, not only on the home but also with service providers such as lenders, contractors, and others during and after the close of escrow.