Cash News
Closing is an exciting part of the home-buying process. As the final step in purchasing your new home, closing makes you the official owner. The closing process also comes with several costs.
The term “cash to close” refers to the total amount of money you will need to pay at closing. This is different from the similarly named “closing costs,” which only make up part of the cash to close. By understanding the difference between the two and how much cash you need to close, you’ll be financially prepared for closing day.
Read more: Closing on a house — What to expect and how to prepare
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Closing costs are fees paid to your mortgage lender, real estate agent, and any third parties involved in your home purchase. According to Freddie Mac, closing costs typically range from 2% to 5% of the home sales price and include the following types of fees:
However, your closing costs are only a portion of your cash to close — other expenses add to your cash to close total.
Learn more: How the mortgage underwriting process works
The term “cash to close” refers to all the money you must pay at closing to complete the home purchase. This includes closing costs, but additional costs go into this final amount. Specifically, you can expect the following costs to be part of your total cash to close:
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Remaining down payment: Your down payment is the percentage of the home sales price paid up-front to secure the mortgage. When you made an offer, you may have placed an earnest money deposit (which comes out of your down payment fund) to be a more competitive applicant. Your cash to close includes your down payment minus any money you’ve already set aside for the earnest money deposit.
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Prepaid expenses: The home seller has likely prepaid several costs for the year, such as property taxes, HOA dues, or homeowners insurance. The buyer reimburses the seller for the prorated amount of these prepaid expenses as part of the cash to close.
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Per diem interest: Home buyers do not typically start making monthly mortgage payments until the month following closing, but they still owe interest for the time between closing and their first mortgage payment. This is known as per diem interest, and buyers must pay it as part of the cash to close. For example, if you close on your home on Jan. 15 and your first mortgage payment is on Feb. 1, you will need to pay 16 days of prorated interest before your first mortgage payment.
Learn more: How long does it take to close on a house?
Your mortgage lender is required to provide your cash to close amount in the Closing Disclosure document three days before your scheduled closing. This legally required, standardized document provides you with important information about your mortgage loan terms, closing costs, fees, and monthly payments.
On the bottom of the first page of the five-page Closing Disclosure, you will find a “Costs at Closing” section that outlines both your closing costs and your cash to close. You will also see an itemized list of expenses under “Calculating Cash to Close” at the top of page three.
Before you receive the Closing Disclosure document, you can estimate your cash to close by adding the down payment, closing costs, prepaid expenses, and per diem interest and subtracting any earnest money funds and seller credits. This can give you a baseline understanding of how much you may need for cash to close.
Learn more: Seller credits — What they are and how they work
Since cash to close is typically a fairly high dollar amount, most lenders do not accept debit cards, credit cards, or personal checks for payment. Instead, you will need to get a cashier’s check or certified check for the total amount. Alternatively, you may be able to pay via a wire transfer, but make sure you are clear on who you are transferring money to — fraudsters can use wire transfers to scam you.
Cash to close can be a lot of money since it usually includes any unpaid part of the down payment, closing costs, and other fees. If you do not have enough money to pay the cash to close, you cannot close on the house. This could mean losing your earnest money or potentially facing a lawsuit from the seller.
Lenders must legally send borrowers a Closing Disclosure document at least three business days before closing. This disclosure will outline your mortgage’s specific terms and fees, the monthly mortgage payment, your closing costs, and the cash to close amount you will pay on closing day.
This article was edited by Laura Grace Tarpley.