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What is Cash to Close? Understanding Your Closing Costs

What is Cash to Close? Understanding Your Closing Costs
Written by Publishing Team

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A home can be one of the most exciting purchases – and also the most complex.

It can already seem like a daunting task to focus on all the details required to buy a home, such as square footage, school district, inspections and appraisals. So it is common for buyers to experience confusion about what to expect on closing day.

Closing day comes with many requirements. Among them, a phrase known as “cash to close” is the most likely phrase for blind-sighted buyers. Closed cash means the amount of money you must bring with you on closing day.

But it’s not just the down payment or final closing costs; Cash required to close each day includes a potential cost, including credits and points. Keep reading to find out what cash to close, how it differs from closing costs, and what payment method you can use.

Cost to Close vs Cash to Close: What’s the Difference?

Closing costs and cash to close are two common terms to describe how much you need to bring with you to the closing table. Before you buy a home, it is important that you understand the difference between the two.

“The difference between cash closing and closing costs is that closing costs are the fees required to take out the loan (or make the closing if the buyer pays cash), and the cash that closes includes the down payment as well,” said Katie Messenger, a Kentucky-based realtor who works with Keeler. Williams.

What are closing costs?

Closing costs are the fees and administrative costs associated with buying a home and obtaining a mortgage. Most closing costs are required as part of obtaining a home purchase loan.

“If someone is paying in cash, most of those go away, and they are basically paying attorney fees to prepare the documents and register the bond, plus the owner’s property policy,” Messenger said.

Common closing costs include:

  • Evaluation fee: An appraisal is a third party’s assessment of a home’s value. Most lenders require an appraisal to ensure that the value of the home is worth whatever the loan amount depends on.
  • lawyer’s charge: Depending on where you live, an attorney may be required to complete the transfer of title. If this is the case in your state, attorney’s fees will be part of the closing costs.
  • Ownership Insurance: When you buy a home, you generally also buy title insurance to ensure that there are no third party claims for your new home. Lenders typically require title insurance on the property for which they are writing loans.
  • Origin Fee: Origin fees are those that lenders charge to create and process your loan. These generally include application and processing fees.
  • Private Mortgage Insurance: If you buy a home at a discount of less than 20%, you may be charged for Private Mortgage Insurance (PMI), which covers the value of the home if you default. For certain loans, the down payment on PMI may be due at the time of closing.
  • Government loan fees: Government-backed loans such as FHA loans, VA loans, and USDA loans may come with their own fees attached to them. For example, FHA loans require an upfront mortgage insurance premium, while VA loans require a VA loan financing fee.

What is the cash to close?

While your closing costs cover the fees and administrative costs associated with buying a home, cash to close includes all the money you’ll need to bring with you on closing day.

Cliff Auerswald, president of All Reverse Mortgage, Inc. said: “Close cash refers to what you pay to actually purchase the home, and that includes the down payment on the mortgage and subtracts any credits you may have taken during the home purchase process.”

Here is a summary of all that cash that needs to be closed:

  • closing costs: Cash to be closed includes all the money you will need to bring with you on closing day, including closing costs.
  • down payment: The down payment is the percentage of the purchase price that you will pay up front. The down payment usually represents the bulk of the cash to be closed. In most cases, it can be as high as 3%, with some people taking as low as 20%. Some government loans such as VA and USDA loans do not require a down payment at all.
  • Mortgage points: Points are fees paid to the lender to “purchase” the interest rate on the mortgage. One point generally lowers the interest rate by 0.25% and costs 1% of the home price. The cost of any mortgage points is also included in your funds for closing.
  • Credits: Lender credits are similar to mortgage points, but work in reverse. Lender credits allow you to reduce your closing costs in exchange for a higher interest rate. If you receive credits to the lender, they will be reduced from your total funds to close.
  • deposit: When you bid for a home, the real estate agent may encourage you to offer serious money as a way to show the seller that you are serious. Serious money is paid up front and usually goes into escrow until closing. If you have paid serious money, it will be deducted from what you owe on closing day.

How is cash for closing calculated?

“Cash to close is calculated by adding the amount the buyer puts in plus the total of all fees listed above (minus any credits to the lender or seller),” Messenger said. “For ease of math, if a buyer buys a home for $250,000, cuts $25,000, and closing costs are $5,000, the cash they’re closing is $30,000.”

You can find your money to close in the Closing Disclosure, which is a five-page form that provides all the details of your mortgage loan.

professional advice

Before closing your home, be sure to read your closing disclosure statement to make sure you fully understand how much you will need to bring with you on closing day.

The amount of closing costs may vary slightly depending on the size of the down payment. Closing costs generally range from 3% to 5% of the loan amount, while down payments often start at 3% and rise to 20% with an average of 6.6%. Therefore, the average closing costs are likely to range from 9% to 12% of the loan amount.

If you have questions about your funds for closing or closing disclosure, you can speak with your mortgage lender.

What payment method can you use?

The payment method you can use to close the cost may depend on where you live and the company you use. Often the only payment methods allowed are certified checks and bank transfers. In other cases, you may also be able to use cash, a debit card, a bank check, or even a personal check.

“Bank transfers are one of the safer options when it comes to paying your mortgage,” Oerswald said. “They are transferred electronically from one bank to another or from one account to another. Bank wire transfers also do not require your presence, so you can be at work while the transaction is in progress. Be careful to make sure you know exactly where you are sending your money to, as wire transfers are not transferable. to the contrary.”

While certified checks and cashier’s checks were once the most popular payment methods for closing cash, more title companies are now requiring wire transfers.

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