What Is the Difference Between Closing Costs and Cash to Close?

This article clarifies two frequently misunderstood concepts in real estate transactions: “closing costs” and “cash to close.” Understanding the distinction between these terms is important for anyone involved in buying or selling a home.

Defining Closing Costs

Closing costs encompass various fees and expenses incurred by both buyers and sellers at the culmination of a real estate transaction. These administrative and legal fees are distinct from the home’s purchase price and are associated with transferring property ownership and securing financing.

Lender fees are a common component of closing costs, covering the costs associated with processing the loan. Examples include loan origination fees, which compensate the lender for preparing the loan, and underwriting fees, which cover the assessment of the loan application. Borrowers might also pay discount points to reduce their interest rate over the loan’s term.

Title-related fees are significant, ensuring property ownership is clear and transferable. This includes title insurance, which protects the lender and buyer against future claims, and title search fees, which involve examining public records to confirm legal ownership. Escrow fees are paid to a neutral third party who holds funds and documents until all sale conditions are met.

Additional expenses often include appraisal fees, which cover the cost of professionally valuing the property to ensure it meets the loan amount. Recording fees are paid to the local government to officially register the new deed and mortgage. Attorney fees are incurred in states where legal counsel is required or customary for real estate closings.

Prepaid items are also considered part of closing costs, though they are often for future expenses. These include an initial deposit for property taxes and homeowner’s insurance premiums, which are typically collected at closing to establish an escrow account. Survey fees, when required, cover the cost of verifying property lines and features. The specific costs and their allocation between buyer and seller can vary based on local customs and negotiated terms.

Defining Cash to Close

Cash to close represents the total sum of money a buyer must provide at the closing table to finalize the real estate purchase. This amount is the net figure required after all financial adjustments, credits, and prior payments have been accounted for. It is the final out-of-pocket payment a buyer needs to make to acquire the property.

The primary components that constitute the cash to close amount include the down payment on the home. This is the initial equity contribution a buyer makes towards the property’s purchase price, typically ranging from 3% to 20% or more of the home’s value, depending on the loan type and lender requirements. A larger down payment can reduce the loan amount and potentially the monthly mortgage payments.

Additionally, the total closing costs, as described previously, are a significant component of the cash to close. These fees are added to the down payment to arrive at the gross amount needed. While closing costs cover various transaction-related expenses, they are consolidated into this single lump sum for payment at closing.

Certain prepaid expenses or initial escrows also contribute to the cash to close amount. These might include initial property tax impounds, a portion of homeowner’s insurance premiums, or homeowners’ association (HOA) dues that cover an initial period. These funds are often collected at closing to establish the necessary accounts for ongoing property expenses.

From this gross total, any credits received by the buyer are subtracted. These credits can originate from the seller, such as concessions for repairs or closing cost contributions, or from the lender, like lender credits for specific loan programs. Furthermore, the earnest money deposit, which the buyer typically paid when the offer was accepted, is credited towards the total cash to close, reducing the final amount due.

How They Differ

Closing costs and cash to close, while related, represent distinct financial concepts in a real estate transaction. Closing costs are the individual fees and expenses associated with facilitating the sale and transfer of property ownership. They are the itemized charges for services rendered, such as loan processing, title searches, and property appraisals.

In contrast, cash to close is the comprehensive final payment a buyer must deliver to complete the purchase. It is the aggregate sum that encompasses not only the total closing costs but also the down payment on the property. Furthermore, it accounts for any additional prepaid expenses and is adjusted by subtracting any credits or the earnest money deposit already paid.

One way to understand the difference is to consider closing costs as the distinct ingredients needed to prepare a meal, each with its own cost. Cash to close, then, is the final bill for the entire dining experience, which includes the cost of all ingredients, the main course, and any beverages.