Cash to Close vs. Closing Costs: What’s the Difference?

LOANS - MORTGAGES
Before you buy your home, here’s what you need to know about cash to close vs. closing costs.
Updated April 3, 2023
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Buying a home is one of the biggest purchases you’re likely to make in your lifetime. It’s also complicated, requiring paperwork, disclosures, and inspections.

When closing day arrives, it’s important to have everything ready to go — including the cash you need to complete the deal. That’s referred to as cash to close. This is different from your closing costs, which are various fees you need to pay when buying a home.

Let’s look at cash to close vs. closing costs so you have a clear idea of what to expect on closing day.

In this article

Cash to close vs. closing costs

Cash to close is the total amount of cash you need to bring with you when you finalize your home purchase. As you consider how to get a loan to buy a home, understanding how much money you need to bring to closing is important so the deal doesn’t fall through.

Closing costs are part of that total cash to close, representing the fees you pay to actually get the loan. So, closing costs are included in your cash to close, but your closing costs don’t represent everything you need to bring to the table.

Let’s look at what cash to close vs. closing costs entail.

Cash to close

Cash to close is the total amount of cash you need available on the closing date to complete the deal. When you come to closing the following items will be used to determine how much cash you need to settle the home purchase transaction.

Down payment

First of all, if you have a down payment, that’s part of your cash to close. This is the amount of your own money you’re putting into the home, expressed as a percentage of the purchase price. It reduces what you borrow to buy the home.

For example, if you buy a home with a price of $300,000 and you have a 5% down payment, you need to bring $15,000 for the down payment. That’s one portion of your total cash to close. Your down payment for a conventional loan could be as little as 3% or as much as 20%. There are also government programs, such as Veterans Affairs (VA) loans and Department of Agriculture loans, that allow borrowers to get a mortgage with no money down if you qualify. 

Closing costs

These are the fees that you pay as part of getting the loan. Your total closing costs will include title insurance, private mortgage insurance (PMI), origination fees, and other costs associated with getting the home loan.

Closing costs are typically 3% to 6% of your home’s purchase price. If your closing costs are 3% of your purchase price on a $300,000 home, you need to bring $9,000 to the closing as part of your cash to close.

Mortgage points

One way to save money over time on a mortgage is to get a lower interest rate. You can spend more money upfront to reduce your interest rate by purchasing mortgage points. A point is 1% of the home’s purchase price.

When you buy a point, you agree to pay 1% of the home's purchase price to reduce the mortgage rate by 0.25%. If you have a 5% mortgage rate and you want it to be 4.5%, you need to buy two mortgage points for $6,000. That gets added to your cash to close.

Earnest money

Cash to close isn’t just about increasing what you need to bring to the closing. You can also reduce your total cash to close. One way to do that is with your earnest money deposit.

When you make an offer on a home, you might offer what’s known as earnest money. This is cash you put up to show you’re serious about completing the purchase. If you back out of the deal, except in certain circumstances, you lose your earnest money. In the meantime, the cash is kept in a separate escrow account.

On closing day, that earnest money is deducted from your cash to close. If you provided $10,000 in earnest money, and your cash to close is $30,000, you only need to bring $20,000 to the closing.

Lender credits

This is the other side of mortgage points. If you want to reduce how much cash you need to come up with in order to close, you can agree to a higher interest rate. You pay more in interest over time, but you don’t need to bring as much to your closing.

Seller credits

Sellers may offer to pay for some of your closing costs, the cost of repairs, or other expenses. These also lower the amount of cash you need to close.

Closing costs

Although closing costs are part of your cash to close, they don’t include the total amount of cash you need to bring with you to the closing table. Instead, closing costs represent the money you pay to get the loan. Some ‌charges you pay depend on the lender and the type of loan you get. Some of the best mortgage lenders will waive some of the closing costs.

Here are some of the closing costs you’re likely to pay when you get a home loan:

  • Origination fees: Lenders go through a lot of paperwork when you get a loan. Often, you cover some ‌costs related to getting a loan. Origination charges include application fees and processing fees. Find out from your lender what items are included in the origination fees. Some lenders waive these fees.
  • Title insurance and title search: Your title is the proof of ownership of the home. Title records indicate who has claim on the property and traces the ownership of the house. However, sometimes there’s another claim on the property, known as a lien. Title insurance is designed to protect against these third-party claims. Most lenders require that you pay for title insurance.
  • Appraisal fees: When buying a home, the lender wants to know that your home is really worth the amount of the loan. An appraisal is when a third-party reviews the home and determines its value. Appraisal fees cover this cost.
  • Attorney fees: A title transfer from someone else’s name to yours might require an attorney in some states. As a result, you might need to pay real estate attorney fees as part of your closing costs to complete the home purchase transaction.
  • Private mortgage insurance (PMI): When you have a down payment of less than 20%, many lenders require you to get PMI. This insurance is designed to protect the lender. If you default, it covers the value of the house. You might need to provide your first PMI payment as part of your closing, and this is included in your closing costs.
  • Government loan fees: Finally, some government-backed loans come with their own fees. If you’re eligible for a VA loan, you won’t have to worry about PMI, but there’s a VA funding fee based on your down payment and other factors. With an FHA loan, there’s a mortgage insurance cost that you might need to cover at closing.
  • Taxes: In some cases, there might be a tax associated with your purchase, or you might need to pre-pay a portion of your property taxes. This is included in your closing costs.
  • Other prepaid expenses: Before your first mortgage payment is due, or if you get homeowners insurance ahead of time, you might owe some money in prepaid expenses to cover costs until you make your first payment. This could include homeowners insurance premiums and interest costs.

In some cases, your mortgage closing costs can be added to your loan balance, but you need to be careful of taking this approach. Anything that gets added to your loan balance is something you pay interest on, increasing your overall costs.

Where to find your cash to close

If you’re trying to figure out how much cash to close you need for your home purchase, you can look at your loan disclosure and closing disclosure.

When getting your loan estimate paperwork, everything is listed. There’s a section on the loan estimate disclosure called “Costs at Closing.” It’s toward the bottom of the disclosure. You’ll see your “Estimated Closing Costs” and your “Estimated Cash to Close.”

Use the “Estimated Cash to Close” to see what you’ll probably need to bring to closing. This can prepare you ahead of time for the cash you’ll need on hand.

However, the Loan Estimate isn’t your final amount. You’ll have a final amount provided to you ahead of the closing in the final closing disclosure and loan disclosure. There’s a lot of paperwork, so look through documents carefully. Ask questions, and consider having a professional you trust review the documents.

How to pay your cash to close

Once you know how much cash you need to close, you need to figure out how to pay the money. In many cases, you won’t be allowed to bring actual cash to the closing. Because you likely need thousands of dollars to complete the transaction, bringing cash isn’t always considered safe.

Instead, many of these transactions require a certified check, cashier’s check, or a wire transfer. Personal checks aren’t typically accepted.

When getting the cashier’s check, find out the requirements, including any identification you need to bring to the bank to get the cashier’s check. With a wire transfer, you want to double-check and verify the information. Wire transfers are generally irreversible, so you want to confirm where the money should go.

FAQs

What does cash to close mean?

Cash to close is the total amount of money you need to provide at your home closing. Your cash to close includes your down payment, closing costs, and any points you might be paying.

Can you negotiate cash to close?

Yes, you could potentially negotiate cash to close. Some lenders will reduce closing costs or waive some of the fees. Additionally, you could negotiate your down payment as well as use mortgage points to reduce how much you need to bring. However, the negotiation usually needs to be complete prior to the closing date.

How do you calculate cash to close?

To calculate your cash to close amount, add up all the money you need to bring to the closing to cover the cost of buying a home. This includes your down payment, closing costs, points, and any other items. Then, if you paid earnest money, subtract out how much you have in escrow. Finally, if you agreed to a higher interest rate in the form of a lender credit, you can subtract out that amount to reduce your cash to close.

Bottom line

It’s important to understand that your closing costs aren’t the same as your total cash to close on a real estate transaction. Although closing costs are part of your cash to close, they aren’t the full picture.

Your cash to close is the total money you need to settle the transaction and includes your down payment and other items on top of the closing costs. Before you decide to buy a home, learn more about the steps to buying a new home.

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Author Details

Miranda Marquit Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.

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