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Closing on your home is an exciting moment. After months of work and preparation, you get to sit at the closing table and sign all of the loan documents, finally making it official that the home is yours.
Don’t forget an important detail as you lead up to this moment: getting a mortgage itself has costs, too. The hard work of the professionals involved in the process, including your mortgage loan officer and real estate attorney, will be included in your closing costs. The cash to close is your total amount.
Let’s explore the difference between closing costs and cash to close, so you can budget appropriately and end the process as smoothly as possible.
What is the difference between closing costs and cash to close?
What are closing costs?
Closing costs are the fees to close the loan, including the services performed by your mortgage loan officer. They can include charges for the underwriting of the loan, real estate commissions, insurance premiums, and the title.
By law, closing costs must be disclosed to buyers and sellers in advance — and agreed upon — before the deal can be completed, so there won’t be any surprises. It’s important to be aware of these costs throughout the homebuying process. Stay in close contact with your loan officer so you know what to expect and can budget properly.
Why do I have to pay closing costs?
Many people and many moving parts are involved in the home loan process. Some states require additional inspections beyond the basic inspection you’ve had. Additionally, there are property and transfer taxes, insurance, and other fees involved when buying a home.
How much are closing costs?
The costs range from 2% to 5% of the home’s purchase price. Fees vary depending on your state, loan officer, and loan type.
Here are some common fees you might pay:
- Application fees
- Appraisal fees
- Home inspection
- Attorney fees
- Prepaid interest
- Loan origination fee
- Mortgage insurance application fee
- Title insurance
- FHA or VA fees
- Property taxes and home insurance
You can use a closing costs calculator to give you an idea of what you’ll pay, depending on where you are in the homebuying process.
What does cash to close mean?
While closing costs refer to the fees you pay a lender to close on your loan, cash to close is the total amount you’ll need to bring to your closing to complete your real estate purchase. This includes closing costs that increase your cost to close and credits that can decrease it.
Cash to close may appear to be a large cost, but it includes money you’ve already accounted for, such as your down payment and closing costs.
What’s included in cash to close?
The total amount you will need to close on your home is the down payment, plus all closing costs. Subtracted from this is your earnest money deposit, as well as any credits from the loan officer or seller.
If minor adjustments were made, or your house was appraised for a higher amount than the price of the home, your closing costs would be lower than originally estimated.
This amount will be detailed in the Closing Disclosure your loan officer will give you.
If you buy your home with less than 20% down, your loan officer usually will establish an escrow account. An escrow account is essentially a savings account where you deposit money when paying your monthly mortgage payments. The lender then uses those funds to manage your property taxes and insurance payments.
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What to expect at closing
Your mortgage loan officer will provide you with two important documents that will prepare you for closing: the Loan Estimate and Closing Disclosure.
Three days after applying with a loan officer, such as Homefinity, you will receive your Loan Estimate. This will provide detail of all fees, the interest rate, and your other costs required to close. Read through this document carefully and be sure to ask your loan officer any questions you have.
Signing this document is legally binding, and the loan officer is required to honor its terms for 10 business days. After those 10 days, market conditions may have changed and the terms would need to be revised.
While signing the document is legally binding, the loan estimates on the document are not. However, the final costs cannot have more than a 10% difference from what was originally listed.
Three days before you close, your loan officer will give you the Closing Disclosure. This is confirmation of your Loan Estimate, with any necessary minor adjustments. It also should be read thoroughly. With this document you have another opportunity for questions to your loan officer.
Need to talk to a loan officer?
You have three days to read the disclosure, so pulling out your Loan Estimate for a side-by-side comparison is advised as well.
What’s in the Closing Disclosure?
The Closing Disclosure has five pages that detail all of the numbers and information about your mortgage:
- Page 1: Includes names and addresses of everyone involved, dates, and the property sale price. A breakdown of terms, payments, closing costs, and cash to close also will be here.
- Page 2: Includes the closing costs listed in detail, separated by costs associated with the loan, and all other costs to close.
- Page 3: Includes a breakdown of the amount of cash you need at closing, and details adjustments for credits and your outstanding amount. The outstanding amount should be the same figure that was listed on Page 1.
- Page 4: Includes consequences if you don’t make your payments by the due date or only make partial payments. Also includes information about escrow accounts.
- Page 5: Includes the total amount of interest the loan will cost, plus brief information about foreclosure and refinancing.
How to pay closing costs
Unlike the term “cash to close” suggests, you won’t bring actual cash to the closing, because most lenders won’t accept large amounts of cash or personal checks. You can either wire the funds from your bank account or bring a cashier’s or certified check with you to the closing.
The best way to pay your closing costs is out of pocket on the day of closing. It may be possible to finance them by folding them into the loan, but then you would have to pay interest on those costs.
Closing your loan successfully
Staying in contact with your loan officer, reviewing all documents thoroughly, and asking questions is the best way to prepare for closing day. This way, if concerns come up after your Loan Estimate is first presented, they can be addressed long before you sign the final Closing Disclosure.
Contact us today to get started on the loan process and start asking those important questions for a smooth home-buying experience from start to finish.