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What is a Closing Cost?

San Diego area home buyers new to the home buying process may feel completely swept up in a whole new vocabulary. You face the difference between a real estate agent and a Realtor®, for example, or between PMI and MLS. One confusing area is closing costs. You may be confounded to learn a closing cost is actually a bundle of many charges.

Commission

Your real estate agent earns a commission, rather than a flat fee, for selling a home. The buyer does not pay this commission; the seller pays a percentage of the sale to the agent. This is usually a relatively small percentage figure, like six percent, but on a half-million dollar house, that is still a tidy sum ($30,000 at six percent).

The commission is split between the seller’s and buyer’s agents in a way acceptable to them and, really, not any concern to you as the buyer, since you are not paying it. The seller barely notices it, either, since it is simply deducted from the sale’s proceeds.

Fees, Fees, Fees

Commission may not be felt by the buyer, but fees are felt by everybody. A typical closing will generate a lot of fees:

  • Escrow fees — A service charge for holding funds in escrow, to guarantee their availability
  • Title search fees — A title search company warrants that no other title exists on your property
  • Notary fees — The services of a notary public require a nominal fee for verifying identify of document signers
  • Deed-recording fees
  • Loan origination fees — Lenders charge for paperwork preparation
  • Appraisal fees — An appraiser pegs the value of San Diego condo or house for sale, based on surrounding, recently sold properties
  • Title insurance fees — Insurance against a claimant stepping forward to claim your property under another title
  • Land survey fees — Not always needed; a surveyor verifies the legal boundaries of your property
  • Credit report fees — Charges for searching and printing credit reports on you, the buyer

San Diego home buyers may feel they are hit especially hard by all these fees, but they are typical of real estate markets around the country. Some of these fees are for interactions between individuals and the municipal government, fees that cannot reasonably be taxed to everyone, since not everyone uses the service. So a charge for recording the change of deed with the county clerk’s office is one fee (in San Diego it is $18 for the first page and $3 for each page thereafter).

You will also pay a company to search registers and records to make certain nobody else has a title claim to your purchased property and that the seller is legally able to sell you the property.

Some of the fees are charges for financial transactions, like loan origination fees; mortgage loans require a lot of research and paperwork, so a fee covers the preparation costs. Private mortgage insurance (PMI) is another type of fee for a buyer unable to put 20 percent down on her or his dream home.

Most closing cost fees are very small for the buyer. While the small fees may seem to add up, in reality they are, together, a very small percentage of the overall value of the home you are buying. A typical San Diego title search on a million-dollar sale costs around $2,200, which is only 0.22 percent of the sale price. In return, you can sleep well at night in your new San Diego home, knowing nobody else can emerge to claim your property.

Where to Look

A lender will provide a good-faith estimate of closing costs as part of the whole loan estimate. These fees can change from the time of the estimate to the actual closing, but are generally good guidance for knowing what fees you may face.

Later, just before the actual closing, your lender will provide a specific breakdown of closing costs in a disclosure statement. This disclosure statement will include everything, including that $18 title first-page recording fee alongside the $2,200 title search and anything else, including document copying and other minutiae. Some new home buyers are surprised at all the entries, but in the overall scheme of a San Diego area home sale, they are very small expenditures. Many of them, too, are borne by the seller, not the buyer.

Ask Questions

Neither your real estate agent nor your attorney is interested in creating a negative experience for you as a client; they want you to be happy so you recommend them to others. At any stage in buying a San Diego home, if you do not understand something, ask questions; be informed! Hiring the right real estate agent with experience working with multiple mortgage lenders and juggling purchase agreements is a good place to start. Working with knowledgable real estate agents means you will be protected from potential legal issues.

Closing costs may seem trivial against the home's total cost. You are a better home buyer by knowing all the services you and the seller are paying for under the catch-all of "closing cost." 

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