Property Tax and Closing Cost Breakdowns Explained

Closing costs and property taxes are two of the most misunderstood parts of buying a California home. Knowing how they work helps you plan your cash needs and avoid sticker shock after you have written an offer. Here is a plain-language overview of the main pieces.

How Prop 13 Shapes Your Property Tax

California's Proposition 13 sets the base property tax rate at roughly 1 percent of assessed value, plus any voter-approved local bonds, assessments or special taxes. After a purchase, your assessed value is generally reset to the purchase price. From there, the assessed value can rise by no more than 2 percent per year while you own the home, unless something like new construction triggers a reassessment.

For example, on a purchase of $900,000, the 1 percent base tax would be about $9,000 per year, or $750 per month. Local assessments, such as Mello-Roos or special district charges, would be added on top and vary by property. Check the preliminary title report and the tax bill for the exact figures.

Supplemental Property Taxes

This catches many buyers off guard. When you buy, the county assessor reassesses the property and issues a supplemental tax bill for the difference between the old and new assessed values, prorated for the part of the fiscal year you own it. The fiscal year runs from July 1 to June 30.

Here is a hypothetical example. If the prior assessed value was $400,000 and your new value is $900,000, the difference is $500,000. At 1 percent, that is $5,000 per year. If six months remain in the fiscal year, the supplemental bill would be about $2,500. This bill typically goes directly to you and is usually not included in your regular mortgage escrow, so plan to set cash aside.

Prop 19 may also affect some homeowners who are 55 or older, or who have certain disabilities, when transferring their existing tax base. Consult a qualified tax professional for details.

Lender Fees

Lenders charge fees for evaluating and funding a loan. Items you may see include:

• Origination or underwriting fees for processing the loan.
• Appraisal and credit report charges.
• Discount points, if you choose to pay them to reduce your rate.
• Prepaid interest from your closing date to the end of the month.

Your Loan Estimate lists these in a standardized format, which makes comparing lenders easier.

Title, Escrow and Recording

These services protect and complete the transaction:

1. Escrow fees compensate the neutral third party that holds funds and documents until all conditions are met.
2. Title insurance protects against certain ownership defects. Lenders typically require a lender's policy, and you may choose an owner's policy as well.
3. Recording fees and transfer taxes are charged by the county, and some cities add their own transfer taxes.

Who pays certain fees can be negotiated or can follow local custom, so review your purchase contract carefully.

Prepaids and Reserves

At closing, you will often fund several months of homeowners insurance and an initial escrow cushion for property taxes and insurance. These are not fees, but they require cash, so include them when you budget. If your home is in an HOA, expect transfer fees and document charges as well.

Build a Realistic Budget

A helpful approach is to add together your down payment, lender costs, title and escrow charges, prepaids, a possible supplemental tax bill and a cash reserve for moving and immediate repairs. Ask your lender for a written estimate early, since the numbers change with the loan type, price and closing date.

Programs, limits and rules change, so confirm current details with your lender, escrow officer or tax advisor.

Next Step

Our free "SoCal Property Tax & Escrow Guide" explains each line item in more detail so you know what to ask. When you are ready to see numbers for a specific property, tap Get Closing Cost Estimate and we will help you build a clear, line-by-line picture.

Thao DP Nguyen | Century Financial Group, Corp. | DRE #01499503 | Broker #01930905 | Global Estate Hub LLC