Understanding Closing Costs: Purchase vs. Mortgage-Related Expenses

When buying a home in California, it's important to understand that closing costs fall into two primary categories:

1. Costs Related to the Home Purchase:  
These are expenses directly tied to transferring ownership of the property itself. Examples include escrow fees, recording fees, transfer taxes, home inspections, broker compensation, prepaid property taxes, and sometimes costs for repairs or warranties negotiated in the sale.

2. Costs Related to the Mortgage Acquisition:
These are direct costs associated with obtaining a mortgage loan. They include lender fees, appraisal, credit reports, mortgage insurance, and broker compensation.

Who Pays What?  
Cash Buyers. Only pay costs related to the home purchase since they are not getting a mortgage.  
Mortgage Buyers.  Pay both the home purchase-related costs and the lender-related costs.

Why Are Closing Costs Different in Every Transaction?  Closing costs vary from one transaction to another because they are influenced by several factors:

1)  Loan Type: Conventional, FHA, VA, or other loan programs have different fee structures.  
2)  Property Value: Higher-value homes typically incur higher transfer and recording taxes.  
3)  Lender and Loan Details: Different lenders charge different origination, processing, and broker fees. 4)  The loan structure:  loan amount, interest rate, and whether you buy discount points also impact costs.  
5)  Negotiations and Local Regulations: Seller concessions, negotiated repairs, negotiated broker compensation and local taxes can make each closing unique.


Let's review some typical costs Related to the Mortgage Acquisition:

1)  Loan Origination Fees:  Usually 0.5% to 1.5% of the loan amount, covering processing and underwriting.
2)  Loan Processing Fees:  Administrative costs for handling your application.
3)  Credit Report Fees: pay for credit checks.
4)  Appraisal Fees: pay to assess property value.
5)  Discount Points: Optional payments to lower your interest rate (about 1% of the loan per point).  Also known as an interest rate buy down.  We will expand on this in an upcoming blog.
6)  Lender’s Title Insurance:  Protects the lender from ownership disputes, paid by the buyer based on the loan size.
7)  Prepaid Interest:  Prepaying interest from closing date to the next mortgage payment.
8)  Private Mortgage Insurance (PMI):  If your down payment is below 20%, PMI is typically required and can be paid upfront or monthly.  (read our blog about the SALT deduction which reinstated PMI as a tax write off in 2025)

9)  Prepaid Homeowners Insurance:  Homeowners insurance is essential for protecting your property and is often required by lenders. Typically, you’ll need to prepay the first year's premium at closing, either as a lump sum or escrowed into your monthly mortgage payments. This ensures your home is insured immediately after transfer.

Let's review Costs Related to the Home Purchase and are not directly related to your mortgage: 

1)  Escrow Fees:   Paid to the escrow company handling the transaction, often split between buyer and seller.
2)  Recording Fees:  Government charges for officially recording the deed and transfer of ownership, varying by county.
3)  Transfer Taxes:  State and local taxes based on the property's sale price.
4)  Home Inspection Fees:  Costs for inspections such as general, termite, or pest inspections.
5)  Prepaid Property Taxes:  You might prepay taxes for the upcoming year or reimburse the seller for pre-paid taxes.
6)  Home Warranties or Repairs:  Sometimes included as part of negotiations, influencing final costs.
6)  Broker Compensation:  Real estate agent or broker fees, which can often be negotiated with the seller or included in the purchase agreement.

In Summary:
Your total closing costs can vary widely depending on your loan type, property specifics, and negotiations. Understanding what costs are associated with the property purchase versus your mortgage helps you plan effectively and avoid surprises at closing.

Note: A responsible Realtor should refrain from providing a ballpark estimate of potential closing costs to clients because of the following reasons:

1. Variability and Complexity:  Closing costs are highly specific to each transaction, influenced by factors such as the loan type, property value, location, lender charges, negotiated terms, and more. Providing a rough estimate can lead to misconceptions or false expectations about the total expense.
2. Legal and Ethical Duty:  Real estate professionals have a fiduciary duty to provide accurate, transparent, and up-to-date information. Offering ballpark figures without detailed analysis can be misleading and may compromise their ethical obligation to act in the client’s best interest.
3. Risk of Misleading the Client:  Inaccurate estimates might cause clients to underestimate their financial obligations, potentially leading to budgeting issues or difficulty at closing, which can damage trust and cause delays.
4. Encourages Due Diligence and Proper Planning:  Instead, responsible Realtors encourage clients to review official documents like the Loan Estimate and to work closely with lenders to get precise, personalized estimates early in the process, ensuring clients have a realistic understanding tailored to their specific situation.

Iit’s best practice for Realtors to advise clients to rely on official documents and direct communications with lenders for precise costs, avoiding ballpark estimates that lack reliability and could potentially mislead. As your Realtors, we are committed to guiding you in the right direction and helping you obtain accurate, relevant information tailored to your specific transaction. Our goal is to ensure you’re well-informed and confident throughout your homebuying journey.

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