Closing costs vs. cash to close: What’s the difference?
When buying a home, you’ll likely see the terms “closing costs” and “cash to close” on your loan estimate and closing disclosure. They might seem interchangeable, but they refer to two different things.
Since these numbers are frequently in the tens of thousands, it’s important to understand the difference.
- Closing costs are all fees and expenses associated with getting a mortgage and closing on a home. These can include appraisal fees, loan origination fees, and title insurance.
- Cash to close is the total amount of money you’ll need to bring to your closing appointment. This includes your down payment, any closing costs that aren’t being paid by the seller or lender, and prepaid items like property taxes and homeowners insurance.
Rarely, your closing costs and cash to close may be the same thing. More frequently, your cash to close will be significantly higher than your closing costs.
What is Included in Your Closing Costs?
Closing costs are all fees and expenses associated with getting a mortgage and closing on your home. However, these can be paid by you, the seller, or the lender; it depends on your negotiations. You should get an itemized list of each closing cost well before closing day.
An origination fee is what the lender charges for processing your loan. It can be a flat fee or a percentage of your loan amount. Some lenders will give you a discount on these charges.
Discount points are prepaid interest you can buy to get a lower interest rate on your mortgage. One point equals 1% of your loan amount. So, if you’re taking out a $250,000 mortgage, one point would cost you $2,500.
The appraisal fee covers having a professional appraiser visit the property to determine its value. Lenders require this to ensure they aren’t lending you more money than the home is worth.
Credit Report Fee
A credit report fee covers the cost of pulling your credit report. Lenders use this to assess your creditworthiness and see if you’re a good candidate for a loan.
Title insurance protects the lender’s interest in your home if there are any issues with the title. This ensures you’re buying the home free and clear of any liens or other claims.
But you can negotiate closing costs. For instance, the buyer might pick up some of your closing costs, or your lender may waive your loan origination fees. So, you can’t rely on your closing costs to relate directly to the cash you need to bring.
What is Included in Your Cash to Close?
Cash to close is the total amount of money you need to bring to your closing appointment. This includes your down payment; closing costs the seller or lender isn’t paying, and prepaid items like property taxes and homeowners insurance.
If you’ve paid anything previously, such as earnest money, it will be included in your cash to close.
Your down payment is the amount of money you spend purchasing your home. The more money you put down, the less you’ll need to finance, and your monthly payments are lower. But you don’t need to put much down with an FHA or VA loan.
As we mentioned, closing fees can be paid by you, the seller, or the lender. However, if someone else doesn’t pay them, they’ll need to be paid out of pocket.
Prepaid expenses are items like property tax and homeowners insurance that are paid in advance. These will need to be paid at closing. Mortgage insurance is another possible expense.
So, in reality, the most important number to you is your cash to close. You have to have that cash on hand.
Closing Costs vs Cash to Close: What’s the Difference?
The biggest difference between closing costs and cash to close is who pays them. You, the seller, or the lender can pay closing costs, but cash to close always comes out of your pocket.
Another difference is that closing costs are a part of the overall picture. They’re fees associated with getting a mortgage and closing on your home. Cash to close is the total amount of money you need to bring to your closing appointment, including your down payment, closing costs, and prepaid expenses.
So, when considering how much money you need to buy a house, remember to factor in your closing costs and cash to close. They’re both important numbers that will impact the overall cost of buying your home.
What If You Don’t Have Your Cash to Close?
If you don’t have the cash to close, you can ask the seller to pay some or all of your closing costs. You can also consider a no-cost loan. A no-cost loan is a loan where the lender pays the closing costs, but you’ll likely pay a higher interest rate.
You could also look into a government-backed loan like an FHA loan, which has more flexible guidelines for closing costs.
Another option is to bring cash by selling some assets, such as cashing out retirement. But your transaction will be canceled if you don’t bring cash to the closing table.
Can You Borrow Your Cash to Close?
You can’t borrow your cash to close because that would defeat the purpose of having cash to close in the first place. Lenders require that you have cash on hand to show that you’re invested in the purchase.
If you don’t have enough cash, your only option is to bring more money to the table or cancel the transaction.
There’s only one exception: rolling costs into the mortgage.
If you’re getting a government-backed loan like an FHA loan, you can finance your closing costs into the mortgage. Alternatively, you can put less money down, so you don’t need to bring more money.
You don’t need to bring as much cash, but it will increase your monthly payments.
How Can You Reduce Your Cash to Close?
The easiest route is negotiations, which your agent can help you handle. To make the deal work, the seller may be willing to offer some of your closing costs. But in a hot market, this is pretty rare.
You can also take on a larger down payment, which will lower your monthly mortgage payments and the amount of interest you’ll pay over the life of the loan.
If you’re a cash buyer, your cash to close will often be substantially less because you don’t have a mortgage or the associated fees. If you have a good credit score, you may also pay less, as the lender may be willing to discount some of the associated mortgage closing costs.
Closing costs vs cash to close are two important numbers to remember when buying a house. To summarize:
- Closing costs are the fees associated with getting a mortgage and closing on your home.
- Cash to close is the total amount of money you need to bring to your closing appointment.
If you don’t have enough cash to close, you must talk to your mortgage lender as soon as possible. It may not be your fault if something materially changed, such as the lending terms you were given.
Otherwise, there’s one thing closing costs vs cash to close have in common: you need both.
No, you cannot. Cash to close is the total amount of money you need to bring to your closing appointment, and it must be paid in full at that time. But there are ways to reduce your cash to close through negotiations or changing your loan product.
No, you don’t need to pay your closing costs upfront. However, if they’re not being paid by someone else, they’ll need to be paid out of pocket once the transaction is complete. So, they do need to be paid before closing.
No, you cannot. Cash to close must be paid in full at your closing appointment, and it cannot be paid with a credit card. Generally, you will need to use either a cashier’s check or a wire transfer.
No, you don’t need any cash to close if you’re selling your house. However, if you’re buying a new home simultaneously, you must have the cash to close that transaction.