Cash to Close vs Closing Costs
Do you know exactly what you need to pay at closing when you buy a home? If you aren’t sure what cash to close means, what your closing cost amounts are, or how to pay them, read on to learn more.
What Is Cash To Close?
On page one of your Closing Disclosure, you’ll see two sections titled “Estimated Closing Costs” and “Estimated Cash To Close” and a dollar amount for each. These sections show the total amount of money you’ll pay during your mortgage closing.
A Closing Disclosure is a document given to you by your mortgage lender that outlines key details of your loan. Your Closing Disclosure tells you exactly how much you need to pay for each of your closing costs, how much you’ve already paid, and how these costs compare to your loan estimate. By law, your lender must give you at least three days to review your Closing Disclosure before you sign.
Closing Costs Vs. Cash To Close: What’s The Difference?
Closing costs refer to the fees you pay to your mortgage company to close on your loan. Cash to close, on the other hand, is the total amount – including closing costs – that you’ll need to bring to your closing to complete your real estate purchase.
Closing Costs
The specific closing costs you pay depend on your loan type, state, down payment, and how much you borrow. A few common fees you might pay are listed below.
Appraisal Fees
An appraisal is a professional third-party estimate of how much the home you’re buying is worth. Lenders require appraisals to ensure the house is worth the amount they’re lending.
Attorney Fees
In some states, you hire a real estate attorney to finalize your title transfer. The attorney fee covers the cost of having a legal expert look over your paperwork.
Title Insurance
Title insurance protects you from third-party claims to your home’s new title. Title insurance companies make sure that the person selling you the home has the right to the title.
They also search for bankruptcies, liens, and other factors that might cause you to lose your home. You only pay for title insurance once during closing and you have protection for as long as you own the home.
Application Fees
Lenders charge application fees to process your mortgage application.
Origination Charges
Mortgage lenders charge origination fees to underwrite your loan.
Private Mortgage Insurance
If you buy a home with less than 20% down on a conventional mortgage, your mortgage lender will require you to buy private mortgage insurance (PMI). PMI helps protect your lender if you default on your loan. Once you reach 22% equity in your home, your PMI is automatically canceled. You may pay your first month’s PMI premium at closing.
FHA, USDA Or VA Fees
If you take out a government-backed loan, you might have to pay a fee to the agency that backs the loan. These fees cover administrative costs and keep the programs going.
FHA loans require an upfront mortgage insurance premium of 1.75% and a monthly fee.
VA loans may require a one-time VA funding fee, depending on how much you borrow and your service history.
USDA loans require an upfront guarantee fee of 1% and an annual fee of 0.35%.
Pest Inspection Fee
In some states, you must pay for a pest inspection before you can close on your mortgage.
Cash To Close
Cash to close includes the total closing costs minus any closing costs that are rolled into the loan amount. It also includes your down payment and subtracts the earnest money deposit you might have made when your offer was accepted, plus any seller credits. It also includes any refunds for overpayments and other credits.
Down Payment
Your down payment likely makes up a large percentage of your total cash to close. Your down payment is a percentage of your home’s purchase price that you pay upfront to your lender. If you get a certain type of government-backed loan (like a VA loan or a USDA loan), you may not need to have a down payment.
Credits
If you’ve already put down money for your down payment with your lender or you’ve already paid closing costs, you’ll see a deduction in your cash to close. Remember to keep careful records so you can discuss any discrepancies with your lender.
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Where Can You Find The Amount Owed At Closing?
You can find out how much you need to pay for each of your closing costs by looking at your Closing Disclosure. You should review it and make sure your lender credited you with any prepayments.
Your Closing Disclosure itemizes your closing costs, telling you exactly how much you owe for each fee or charge. Your cash to close amount is usually higher than your total closing costs because it includes your down payment.
Before you sign onto your loan, compare your Closing Disclosure with your loan estimate. The charges, interest rate and loan terms on your Closing Disclosure should be very similar to your loan estimate. If a charge has changed from your loan estimate to your Closing Disclosure, you should discuss this with your mortgage lender.
How Can You Pay Your Cash To Close?
There are a few ways that you can pay your cash to close. More secure forms of payment include cashier’s checks, certified checks, and wire transfers. Credit, debit cards, and personal checks might be accepted but aren’t recommended.
Cashier’s Check
A cashier’s check is a check certified by your bank. They initially use the bank’s own money to pay for your charge. After the lender cashes your check, the bank withdraws the money from your account. Cashier’s checks include security features like signatures and watermarks that make them hard to counterfeit. You can get a cashier’s check by visiting your local bank or credit union and requesting one. Most lenders prefer these over certified checks.
Certified Check
A certified check tells the lender you have enough money in your account to cover the cost. When you request a certified check from your local bank or credit union, they’ll make sure you have all the needed funds in your account and will sign on your check. Finally, the bank locks the amount in your account until the lender cashes the check.
Wire Transfer
Wire transfers allow you to electronically send money to your lender before closing. You can ask your bank to do a wire transfer in person, over the phone, or even on the internet. If you aren’t able to make it to the bank in person before closing, a wire transfer is a great option.
Most banks use a service called Society for Worldwide Interbank Financial Telecommunication (SWIFT) to complete wire transfers. Ask your mortgage lender for their SWIFT address so you know where to send your funds. Keep in mind that wire transfers are not immediate, and it may take a few days for your lender to receive the funds. Double-check the address before you send money because wire transfers are not reversible.
Cash
Though your lender may accept actual cash during your closing, it’s not a recommended payment method. Using paper money to pay for your closing may set off questions about where the money came from. Some title companies and mortgage providers have even banned cash payments during closing.
Credit Or Debit Card
Your lender needs to know you have the money ready for closing costs in your account before they approve your loan. Credit cards allow you to borrow money from a creditor, so they’re risky for lenders. Credit card companies also block large and unusual charges based on your spending habits, so even if you have a debit card, your closing costs will almost always be automatically blocked.
Personal Check
Anyone can write a personal check for any amount, even if they don’t have the money to cover the bill. When a check bounces, it means you’ve written a check for more money than you have, and it often takes a few days for the bank to figure this out. The risk of a check bouncing is high, so lenders require you to go to the bank to get a certified or cashier’s check to cover your closing costs.