When you first look at your Closing Disclosure, there will be two terms on the first page that you might find confusing. They sound very similar when in actual fact, cash to close vs. closing costs are very different.
If you want to know how much money you’ll need on the day of closing, understanding the difference between cash to close vs. closing costs will be important.
What are Closing Costs?
Closing costs are fees you pay to your mortgage company. They have a role to play in finalizing your loan. Your closing costs will depend on several things, such as the type of loan, where you live, your down payment, and the size of your loan. You’ll have to pay a range of fees, depending on the details of your loan.
Here are some examples of the more common fees you’ll have to pay:
- Application fee: This is the fee your mortgage lenders charge for processing your mortgage. It’s the initial administration charge.
- Attorneys fee or settlement fee: This fee covers the finalizing of your title transfer and is paid to a real estate attorney. If you use an Escrow agent, you’ll pay a settlement fee.
- Recording fee: This covers the transferring of the property from the seller to the buyer. Rates vary depending on where the property is registered. For example, in Wayne County, you pay $15.00 for the first page and $3 for subsequent pages. In Macomb and Oakland County, on the other hand, recording fees start at $30.
- Title search/title insurance: When you purchase a property, you must check the status of your property to protect the property’s title against any third-party claims. A title search is performed, and it checks for past bankruptcies, liens, or other factors. You pay for this title search and for title insurance.
- Appraisal fee: The value of your new home is appraised by a professional appraiser. The appraisal is used by the lenders to confirm the value of the house and to determine whether they are lending more money than the house is worth.
- Origination charge: This fee covers the cost of underwriting the loan.
- Private mortgage insurance: If you’re purchasing your new home with less than a 20% down payment, a conventional mortgage lender will insist that you purchase private mortgage insurance. Should you default on your loan, the insurance protects the lender. You must pay the first month’s PMI premium when closing your mortgage deal.
Other closing costs might include:
- Home inspection
- Prepaid interest
- Loan origination fees
- FHA or VA fees
- Property taxes and home insurance
Do You Have to Pay Closing Costs?
Yes, you do have to pay closing costs, whether you’re buying a home or refinancing. Most of the closing costs are paid by the buyer, but typically, the seller will have to pay some too. The real estate agent’s commission is just one example.
How Much are Closing Costs?
How much you’ll have to pay in closing costs depends on several factors but on average they run between 2% and 5% for the buyer. So if the property you’re buying is $300,000, for example, you can expect to pay between $6,000 and $15,000 in closing costs.
If you’d like an idea of how much you’ll have to pay in closing costs, there are lots of closing costs calculators available online.
You have two options when it comes to covering your closing costs. The most cost-effective way is to pay them directly out-of-pocket as a one-time expense. The other option is to fold them into the loan. Not all lenders allow you to do this, but if yours does, remember that you’ll be paying interest on your closing costs through the life of the mortgage. At the end of the day, this means your closing costs will be much more.
If you’re concerned about cutting costs, it is possible to negotiate some of the fees, thereby lowering your closing costs. In some states, counties, and cities, low-interest loan programs or grants are available for first-time buyers to help with closing costs.
You will have been notified of your closing costs when you first apply for a loan. It is a requirement that all lenders do this. Your closing costs are also stipulated in the Closing Disclosure document you receive in the days before the settlement. It’s important that you review these closing costs and ask any questions if you don’t understand.
If you need further clarification on the difference between cash to close vs. closing costs, your lender will be able to explain.
What is Cash to Close?
What’s the difference between cash to close vs. closing costs is really a trick question, as one is part of the other. Your cash to close figure includes your total closing costs minus any fees that are rolled into your loan amount. It also includes your down payment and subtracts the earnest money deposit you may have made when your offer was accepted. Cash to close also includes any seller credits, any refunds for overpayments, and other credits.
Let’s see if we can clarify the difference between cash to close vs. closing costs a little simpler. Closing costs are the fees you pay to your lender to close on your loan.
On the other hand, cash to close is the total amount you need to bring to the closing table so you can complete your real estate purchase. Therefore, closing costs can increase your cost to close, while credits can decrease it.
What’s Included When Calculating Cash to Close?
Figures that are included as part of your cash to close amount include:
- Down payment: This is the percentage of your home’s purchase price that you paid upfront to the lender. The down payment is possibly the biggest cost in your cash to close. Depending on the type of loan, there are minimum requirements you’ll have to meet. For example, for an FHA loan, the minimum down payment is 3.5%. For a conventional loan, it’s only 3%. There are also certain government-backed loans, such as USDA loans or VA loans, that require no down payment.
- Total closing costs: These are upfront costs that are required to complete your real estate transaction.
- Prepaids: Prepaids include interest that may have accrued on the loan between the closing date and the end of that month, the first year of your homeowner’s insurance premiums, and other assessment costs. Some of these costs could be put into an escrow account. An escrow account is often used if you buy your home with less than 20% down. The loan officer opens this type of account, and it’s where you deposit money when paying your monthly mortgage payments. It’s a kind of savings account. The lender uses any funds you put there to manage your property taxes and insurance payments.
- Credits: Credits are the money you’ve already put down or fees you’ve already paid to the lender. They will be shown as a deduction from your total cash to close. Credits can also take the form of costs the seller has agreed to pay.
How to Calculate Cash to Close
A few days before your closing date, it’s usual for the lender to send out a five-page document that’s called the Closing Disclosure. In this important document, they will highlight the total fees and expenses you’re going to pay for your home loan.
Check this document carefully because it will help you to better understand the difference between cash to close vs. closing costs. The information will include:
- A summary of your loan terms
- Projected payments
- Costs due at closing, including totals for your closing costs and cash to close amounts
- A breakdown of how the amounts are calculated
Estimated Cash to Close Amount
There is a formula that’s generally used to calculate the final cash to close amount. If you want to make your own estimate, here is the formula:
- The total amount of closing costs
- MINUS any closing costs paid before closing and those rolled into the loan amount
- PLUS down payment funds you may have made
- MINUS your original deposit
- MINUS any seller credits, adjustments, refunds, or other credits
- EQUALS the total Cash to Close amount
You’re only advised of the cash to close the amount a few days before closing. This doesn’t give you very much time to gather the money needed to close the loan. So let’s quickly run through the process for getting a reasonable estimate.
Step 1: Determine the Purchase Price of Your Home
If the seller has already accepted your offer, you know the exact purchase price. If you’ve not found your dream property yet, or haven’t started looking, decide on the maximum purchase price, your budget will allow.
Step 2: Calculate Your Down Payment
You can calculate your down payment by estimating the percentage you plan to pay. For example, if you plan on making a down payment of 3% and the purchase price of your house is $200,000, you need to find $6,000.
Step 3: Calculate Closing Costs
Typically, closing costs work out to be between 2% and 5% of the purchase price. If you want your estimate to stay on the safe side, use 5% to estimate the closing costs. It’s always better to overestimate rather than underestimate. For example, if the purchase price of the house is $200,000, your closing costs are estimated at $10,000.
Step 4: Combine Down Payment and Closing Costs
Add your closing costs and down payment amounts together, and this will give you your estimated cash to close amount. For your $200,000 house, that means you have to add $6,000 and $10,000, which equals $16,000.
Step 5: Deposits or Credits
The final step in the calculation is to subtract any deposits or credits you might know of.
As you can see, the calculation is a very simple one, as long as you know all the component figures.
Ways You Can Pay Your Cash to Close
Cash to close is a confusing term because it’s rare that this amount is paid in cash. How you pay your cash to close amount varies from lender to lender. There are, however, several common payment methods:
- Wire transfer: This is an electronic payment method
- Certified check: A certified check is a form of a check that certifies the check is legitimate and will not bounce as you have sufficient funds in your account
- Cashier’s check: This type of check is issued and backed by the bank
Cash to Close vs. Closing Costs – Final Thoughts
When you’re ready to pay your cash to close amount, you know you’re one step closer to owning your own home and receiving the keys. Know you understand the difference between cash to close vs. closing costs, you can ensure you’ve got the money you need and avoid any surprises.
Also, remember to keep careful records of any payments you make. You’ll be able to use these records for reference should you need to discuss any discrepancies with your lender.