You hear a lot of terms thrown around when you buy a home. Two of the most common are closing costs and cash to close. While they sound similar, the truth is that closing costs vs cash to close are not the same thing.
Understanding the differences can help you understand the true cost of your mortgage.
What are Closing Costs?
Closing costs are essentially the cost to do business with the lender and any third parties involved in the transaction. Some of the most common closing costs include:
- Underwriting fee
- Processing fee
- Appraisal fee
- Lawyer fees
- Title fees
- Credit report fees
- Origination points
- Discount points
This is just a sampling of what a lender may charge. Your lender must send you a Loan Estimate, which is a statement that breaks down the estimated closing costs for you within 3 days of receiving your loan application. The lender must also send you a Closing Disclosure three business days before you close on your loan so that you can see the final cost of your closing costs.
What is Cash to Close?
Logic would make you think that the cash to close that you need is equal to the closing costs. While this sounds logical, it’s not the case.
The closing costs are just one piece of the puzzle. You also have to figure in your down payment and any other fees you need to bring to the closing table, such as real estate taxes or homeowner’s insurance premiums.
The amount of cash to close that you need will be the total of all expenses. Your lender probably won’t have this number until they are ready to provide you with your Closing Disclosure, as they need all final numbers from all parties involved in the transaction.
Closing Costs vs Cash to Close – What do you Look At?
So now that you know both numbers, you probably wonder how you should figure out the amount of money you’ll need to bring to the closing.
While the closing costs play a role, you’ll need to consider a number of other factors:
- How much of a down payment are you making? You’ll add this to the cash you need for closing.
- How much money do you need to cover real estate taxes? The exact amount depends on the cost of the taxes as well as the due date. The sooner the taxes are due, the more money you’ll have to bring to the closing.
- Did you pay for your homeowner’s insurance premium (12 months) already or will you pay it at the closing? If you will pay it at the closing, you must add this amount to your total.
- Is the seller give you any credits? Sometimes sellers help buyers with their closing costs or they give a credit for something that is wrong with the home that they didn’t want to fix. The credit will reduce the amount of cash you need for closing.
- Is the lender providing any credits? Sometimes lenders offer credits whether as a promotion or because of some negotiations you did. This will also reduce the amount of cash you need at the closing.
What’s Higher Closing Costs or Cash to Close?
In most cases, the cash to close is much higher than the closing costs. That’s because of the figures that you must add to the closing cost figure. For example, if you are making a large down payment, that will significantly increase the necessary cash to close.
In some cases, though, you may end up with a number that is lower than the closing costs. These cases are rare, but it can happen. Here’s an example:
You are a veteran so you are eligible for a VA loan. You don’t need a down payment. You have the standard closing costs, but your seller is willing to give you a 5% seller concession to help you buy the home. Your cash to close in this situation would actually be less than the closing costs, but only because you don’t need a down payment and are getting help with the closing costs. The only thing that might increase how much you must bring to the closing is if the real estate taxes or homeowner’s insurance amounts due are very high.
Closing costs vs cash to close are something to give careful consideration to before you close on a loan. Don’t make the mistake of assuming you only need to cover the closing costs, you’ll be unpleasantly surprised when you get the final Closing Disclosure. Understanding the big picture will help you be better prepared.