When buying a new home, it is no surprise that you have important questions regarding your real estate purchase. That is because the home buying process can feel confusing. Especially when it comes to knowing the difference between “cash to close” and “closing costs.”
Knowing what upfront costs you will have to pay on the day of closing is an integral part of the homebuying process. It helps you understand each part of the purchase and ensure that you have enough total cash in your bank account come closing day.
The best part is you do not feel blindsided by additional fees on your closing date.
Cash to Close vs. Closing Costs
Buying a home is not always as simple as paying the listing price.
Most buyers can assume that buying a home will incur more costs than the home’s purchase price and the loan estimate amount. The following explains the difference between “cash to close” and “closing costs,” as well as the fees that home buyers need to consider when purchasing a home.
Cash to Close
“Cash to close” is a term to describe the total amount of money needed to pay on closing day when finalizing the purchase of a home. This term is sometimes used interchangeably with “funds to close.” This is the total amount due to close the home sale purchase officially.
Cash to close does not refer to actual money, and most houses cannot be purchased using cash. You also cannot pay for a property using a personal check.
Check with your mortgage lender ahead of time to find out what types of funds are accepted. Most times, you will want a cashier’s check or need a notarized cashier’s check. That means you will want to arrange to have it ahead of time.
It is also not the same as a “dry closing,” in which a home sale transaction closes and all requirements are met except for the actual disbursement of the funds. The home can close and change hands without the payment going through.
Cash to close includes the total closing costs and additional fees.
The following are different fees that need to be considered when calculating the cash to close price.
Down Payment
The down payment is used to pay toward the home purchase, outside of the mortgage loan amount. Since this payment goes toward the home’s total cost, it reduces your home loan amount.
Origination Charges
This is a fee charged by the mortgage company for processing the loan.
Taxes
Once you purchase your home, the property taxes transfer into your name. At closing, you will usually have to pay for the prorated property taxes for the amount of time you own the home during the year that you purchase it. Future property taxes will usually be paid through an escrow account.
Prepaid Items
Sometimes referred to as “prepaids,” prepaid items include PMI, hazard insurance, and other assessment expenses.
Closing Costs
Mortgage closing costs are a little different than cash to close. Closing costs are part of the cash to close amount. They can include additional fees like property-related costs, loan-related fees, or private mortgage insurance (PMI).
Many standard fees may be included in closing costs.
Application Fee
Lenders charge an application fee to process a mortgage loan. This cost usually covers the initial administrative charge to process your mortgage application.
Attorney Fees or Settlement Fee
A real estate attorney helps to finalize your title transfer. If you use an escrow agent instead, you will be charged a settlement fee.
Recording Fee
A recording fee is a type of transfer fee. It is the cost of transferring a property from a seller to the buyer. The county determines the rate of this fee.
Title Search or Title Insurance
The title company conducts a title search. It reveals any past bankruptcies, liens, or other issues that may be associated with your new property.
Title insurance can protect against any claims made on the property title of the home you purchase. The insurance is paid at closing and covers the property as long as you own it.
Appraisal Fees
An appraisal is performed by a professional third party and estimates the home value. Mortgage lenders use an appraisal to approve a loan amount. As determined by the assessment, they will not approve a loan for more than the home’s value.
PMI
If you do not put down at least 20% of the home’s value with a conventional loan, the lender will require that you also purchase PMI. It is an insurance fee added to monthly mortgage payments and protects the lender if you default on your loan. The first month of PMI is paid at closing.
Origination Charge
The origination charge is an underwriting fee assessed for underwriting the loan.
Pest Inspection
Some states require a pest inspection, which also comes with a fee. This service can sometimes be added to the home inspection.
FHA, USDA, or VA fees
If you get a government-backed loan, you might also have to pay a fee to the agency that backs the loan. The price is paid to cover the administrative costs associated with the loan and helps to ensure that the programs keep going.
FHA Loans
This loan program requires an upfront mortgage insurance premium of 1.75%, as well as a monthly fee.
VA Loans
VA loans may require a single VA funding fee. It is determined by the amount you are borrowing and your service history.
USDA Loans
These types of loans require an upfront guarantee fee of 1%. They also assess an annual fee of 0.35%.
Are You Looking to Buy a Home in Florida?
Buying a house can be expensive. Closing costs are a part of that expense and can add up quickly! That means you are probably wondering how you can minimize them.
Start by negotiating. You can negotiate with the seller to have them cover some (or all) closing costs.
You can also look for appraisers, title companies, and other experts with the best rates.
Do you still have questions? If so, Tropic Coast Homes can help! We can help answer your questions and find you a deal on a new home.