What Is Cash to Close vs. Closing Costs?

When buying a home, terms like “cash to close” and “closing costs” can be confusing. While related, these terms refer to distinct financial obligations, both representing money you pay during a real estate transaction. Understanding their difference is important for budgeting and preparing for your home purchase, ensuring a smoother path to homeownership.

What Are Closing Costs

Closing costs encompass various fees paid at the end of a real estate transaction. Buyers typically bear the majority, ranging from 2% to 6% of the loan amount or purchase price. The exact amount fluctuates based on property location, lender, and transaction details.

Lender-related fees include charges for processing and underwriting your loan, such as loan origination and appraisal fees. Other common lender charges include credit report and flood determination fees.

Title and escrow services include fees for title insurance, protecting the lender and buyer against future property claims, and recording fees. Escrow fees cover the neutral third party that holds funds and documents until all sale conditions are met.

Prepaid items are expenses paid at closing that cover periods beyond the closing date. These often include property taxes, homeowner’s insurance premiums, and homeowner’s association (HOA) dues. Many lenders require buyers to pay a year’s homeowner’s insurance at closing and establish an escrow account for future property taxes and insurance payments.

What Is Cash to Close

Cash to close represents the total money a homebuyer must bring to the closing table to finalize the real estate transaction. This figure is more comprehensive than just closing costs, as it includes other significant financial components. It is the final sum needed to complete the purchase and acquire your new home.

The calculation for cash to close involves adding your down payment and total closing costs, then subtracting any credits you receive. The down payment is often the largest portion, representing a percentage of the home’s purchase price.

Closing costs are added to this down payment amount. While closing costs are a component of cash to close, they are not the entirety of the funds required.

Various credits can reduce the final cash to close amount. These may include an earnest money deposit, an upfront payment applied towards the down payment or closing costs. Seller credits, where the seller agrees to cover expenses, or lender credits, which can reduce closing costs in exchange for a higher interest rate, also lower the final amount due.

Navigating Your Closing Documents

Two financial documents guide homebuyers through the closing process: the Loan Estimate (LE) and the Closing Disclosure (CD). These forms provide transparency regarding the costs associated with your mortgage loan and the entire transaction. Understanding their purpose helps buyers track and verify expenses.

The Loan Estimate is a form lenders provide within three business days of a mortgage application. It offers an initial estimate of your loan terms, projected monthly payments, and estimated closing costs, including estimated cash to close. While it provides a comprehensive overview, the figures on the Loan Estimate are not final and can change.

The Closing Disclosure is a document that presents the final, confirmed figures for your mortgage loan and all closing costs. Lenders are required to provide this document at least three business days before your scheduled closing date. This document itemizes all fees and charges, showing exactly how much cash you will need to bring to close.

Buyers should compare the Closing Disclosure with their most recent Loan Estimate to identify any discrepancies in costs or terms. While some costs, such as prepaid interest or third-party fees, may vary slightly, significant changes should be questioned with the lender. The Closing Disclosure serves as the definitive statement of your financial obligations for the home purchase.