If you are buying a home in California, you have probably heard the term “closing costs.” What you have probably never gotten is a straight explanation of what they actually are.
It matters because this is money you have to pay on top of your down payment. If you cannot cover your closing costs, you cannot buy the house. And if you want to be a savvy buyer, it is just as important to understand how to eliminate them.
My name is Jon Schwartz, I am a California Realtor, and last year I saved my clients over $505,000 in homebuying fees. Here is exactly what closing costs are, the real line items from an actual transaction, and how to wipe them out completely.
“Closing costs” is a blanket term for all the fees and expenses you take on when buying a house. It is money you have to bring to the closing table, on top of your down payment, to complete the purchase.
They are called “closing costs” because you do not pay them until the closing, the very end of the transaction. A purchase typically takes about a month to close, and at the end of it the escrow company sends you a bill for your down payment plus all of these costs.
The Ballpark
The total is different for every transaction, but as a general rule in California, closing costs run 1.5% to 2% of the purchase price.
So say you are buying a $1,000,000 home with 10% down. You can expect closing costs somewhere between $15,000 and $20,000. Add that to your $100,000 down payment, and you should have roughly $120,000 saved to complete the deal.
Every one of these fees shows up on a single document called the “settlement statement,” the final ledger for the transaction. The examples below come from a real California settlement statement.
Lender Fees
The biggest source of closing costs is lender fees, what your lender charges to complete your loan. There are the big ones with official-sounding names like the processing fee and the underwriting fee, and then a pile of smaller, seemingly arbitrary ones: a credit report fee, a tax service fee, an application fee, a verification of employment fee.
Is it a racket? Yes. Is there much you can do about it? Honestly, no. Every lender tacks on these little fees. What actually matters is the mortgage rate and the origination fee, and those are worth shopping for.
Escrow Fees
Next are escrow fees. The escrow company is a neutral third party that oversees the transaction because buying a house is a lot more complicated than buying a pair of shoes. It charges for that oversight, usually listed as the settlement agent fee, and like the lender, it adds its own run of small fees: a loan tie-in fee, a wire fee, a document fee, a compliance fee, even a UPS fee.
Is it a racket? Yes. Can you avoid it? Not really. In California it is customary for the seller to choose the escrow company, so as the buyer you do not even get a say. Every escrow company charges these miscellaneous fees, so do not let them get under your skin.
Title Fees
Then there are title fees. Having title to a house means you own it, and the county keeps track of who holds title to every property, like vehicle registration but for homes. Occasionally, two parties can claim title to the same house. It is rare, but to protect against it, buyers purchase title insurance, a policy that defends your claim in court and compensates you if you somehow lose the home to another claim.
This almost never happens, but today everyone buys title insurance anyway, and the title company adds its own stack of fees: an endorsement fee, a sub-escrow fee, a messenger fee, and several recording fees for the deed and the mortgage.
Prorations
There are also two categories that are not really fees. The first is prorations, which is just a fancy word for part of something, and it mostly refers to property taxes. If the seller has already paid property taxes past your purchase date, you pay them back for the portion you will own.
Prepayments
The second category is prepayments, which are exactly what they sound like. When you buy a home, you typically prepay a year of homeowner's insurance, and if it is a condo or townhouse, a year of HOA dues. This adds to your upfront cost, but then you are covered for a year, which is not a bad trade.
The Real Move
So that is the full picture: a stack of fees, some big and many small, plus a couple of prepayments, all due at the end of the transaction. Now here is how to eliminate the whole thing.
To explain how, I have to tell you about me – specifically me, not agents in general. I bought and sold three homes as a regular homebuyer and investor before I ever became an agent, and I became an agent because I hated working with agents! They seemed to offer very little value while charging a great deal of money.
So when I started working with buyers in 2020, I set out to offer more and charge less. Most buyers' agents take a 2.5% commission. On a $1,000,000 purchase, that's $25,000 that does not go toward actually buying the house. My commission is 1%. That's all I charge, and for that, I deliver top-tier guidance through the entire process, from crafting the right offer to negotiating with the seller to closing on time.
When you make an offer, you ask the seller to pay your agent's commission. It still comes out of the money you are putting down or borrowing, but on paper the seller pays it. Because my clients ask for 1% instead of 2.5%, their offers are far more competitive.
But there is a second way to play it. Some of my clients ask the seller for a full 2.5% commission. When that happens, I keep only 1% and credit the other 1.5% back to the client. And since closing costs run about 1.5% of the purchase price, that credit can wipe out your closing costs entirely. That is exactly what one recent client did: we asked for 2.5%, I credited back 1.5%, and their closing costs disappeared.
Conclusion
Expect closing costs of 1.5% to 2% of the purchase price, on top of your down payment.
Lender, escrow, and title fees are largely unavoidable, so focus your energy on your mortgage rate and origination fee.
Prorations (property taxes) and prepayments (insurance and HOA) round out the bill.
With a 1% agent who credits back the difference on a 2.5% commission, you can eliminate your closing costs entirely.
Closing costs are not a mystery once you see them for what they are, and they are not fixed in stone either.
