Average Closing Costs in California - A Closer Look

Editor's note: I started researching the average closing costs in California in 2011, when my wife and I were buying a house in San Diego. It was a personal process at the time. But after compiling the data, I realized many people could benefit from the research. This article is the result. This is everything I learned about real estate closing costs in California.

Closing costs are the various fees, charges and taxes needed to (A) originate a mortgage loan and (B) transfer a property from seller to buyer. Most of these fees are paid by the borrower. In some cases, the seller may contribute money toward the buyer's closing costs. This can all be negotiated during the offer process.

California: One of the Most Expensive States

You probably won't be surprised to hear that California has some of the highest closing costs in the country. After all, we have some of the most expensive real estate markets as well. And these things go hand in hand.

A 2010 survey by Bankrate.com found that California's settlement fees were among the highest in the nation. Texas, New York and Utah were the only states with higher averages. According to the study, the average closing costs in California for a $200,000 were around $4,400. A larger loan would bring even higher costs.

You'll Probably Pay More Than This Average

If you do a Google search for closing cost averages for California, you'll find some numbers in the $4,000 - $5,000 range. But when you get an actual estimate from your lender, you may find that your closing costs to be twice this amount. Why? Because most of these "averages" only account for the lender's fees. They usually leave out the third-party / non-lender fees for title company, escrow company, etc. And these fees can significantly increase the total amount you pay at closing. 

Nor does this average include any discount points that might be paid. Many home buyers choose to pay interest up front, at closing, in order to secure a lower interest rate. This is done by paying "points," which are basically a form of prepaid interest. One point equals one percent of the loan amount. In the table below, I've included the average points paid at closing so you'll have a more accurate picture of total closing costs.

What's Included in Your Closing Costs

The list below is fairly comprehensive. It includes nearly all of the closing costs a California home buyer might incur. Just keep in mind that some of these costs are negotiable. Others might be waived by the lender, as an enticement / incentive. So while you will certainly encounter some of these costs when buying a house, you might not see all of them.

Note: The estimated costs below are for a 30-year fixed-rate mortgage in the amount of $250,000. Some of these fees, such as the origination fee, are tied to the purchase price of the home. So if you double the home value, you also double those particular costs.

When you add up all of the fees, charges and taxes above, it comes out to $8,465 in total closing costs. If the purchase price was $500,000, you could add another $5,000 onto the closing costs (due to the higher origination fee and discount point).

You might be scratching your head and wondering, "Why did Bankrate.com say that the average closing costs in California were $4,400?" Remember what I said earlier. These averages often include the lender's fees while omitting the non-lender fees -- and these third-party fees can easily double total amount of costs. If you apply for a mortgage loan and expect your settlement fees to be less than $5,000 (because of some article you read online), you're in for a surprise.

Estimating Your Total Costs

The best way to estimate your closing costs is to apply for a loan. After you submit your application, the lender is required to give you a document called the Good Faith Estimate. This is required by federal law, under the Real Estate Settlement Procedures Act (RESPA).

Starting on page one of the GFE, you'll see a "Summary of Your Settlement Charges." This summary continues onto page two of the document, where you will see the total estimated settlement charges.

Note that this is only an estimate. Your actual closing costs may be higher than the estimated amount. But new legislation limits the difference to 10% in most areas. This means that if the actual cost for a certain item exceeds the estimate by more than 10%, the lender must pay the excess.

So, for the first time ever, mortgage lenders have an incentive to be as accurate as possible on the Good Faith Estimate. This is good news for you, as the borrower. It means your total closing costs shouldn't be too much higher than the estimate.

Expect Surprises and Save Accordingly

My advice is to save extra money for your closing costs. We've just seen how they can go up between the time you apply for the loan and the day you close. So expect surprises, and plan accordingly. The more money you can put aside between now and your closing date, the better.

Disclaimer: This article discusses the average closing costs in California, based on a mortgage amount of $250,000. Your actual costs will vary based on several factors. These factors include the size of your loan, the lender you use, and whether or not you choose to pay points at closing. This information is provided as a general guide only. It is not intended to serve as a financial-planning tool. The closing