Your initial investment into your home may come in the form of a down payment. However, there are other costs attached to home buying. Understanding these costs will empower you to make intelligent and informed real estate decisions. It is also critical to remember that cash to close is not payable in literal cash, and it is not likely that you will supply the payment in that form.
Cash to close is a lump sum of three major items in the home buying process, including:
- Down payment
- Closing cost
- Prepaid items
Celebration day, or closing day, requires you to know how much money you will need to secure a property. Getting the keys to your home takes the right decisions, and you can make preparations with a few key details of the day.
Down Payments in Cash to Close
On your path to closing on your home, one of the most significant expenses that you will pay upfront will be your down payment. This amount alone is not your closing cost, but it is a part of the total cash to close. Down payments are a percentage of the home price. For example, with a 20% down payment, you multiply .20 by the property's worth to calculate down payment costs.
Putting more money down on a home at closing will allow you to pay less in interest and fees over the life of the loan, and the same is true inversely. Smaller down payments lead to greater interest and expenses throughout the mortgage. Bringing a higher down payment may also allow you to be more competitive as a buyer.
The type of loan qualification you have is also affected by the down payment you make. This qualification includes the total amount a lender will give you and the loan conditions. In addition, your down payment impacts your financial picture in the long term due to planning around your monthly mortgage payments. Having a plan to approach your down payment can help with planning.
Costs to Close the Loan
Lender Fees
The cost to close the loan requires more than a single box to be checked. For example, there are fees associated with origination or the lender's price for processing a new loan application.
Origination fees also serve as compensation for executing the loan. The cost price is generally a percentage of the total loan and may range from .5% to 1% of a mortgage. However, origination fees are negotiable, though paying a higher interest rate frequently avoids these fees. In addition, a buyer will know the fees in advance of the closing since they are defined before the loan execution.
Credit report fees are the only fee a lender can ask you to pay before providing a loan estimate. As its name implies, it is for the expressed purpose of obtaining your credit report.
Underwriting fees compensate a financial firm for the risk they accept by supplying a loan or insurance. They receive this fee for the underwriting of a public offering. In the case of underwriting fees charged separately from origination fees, costs tend to range from $400 to $900 based on the lender and type of mortgage.
Appraisal fees can vary with the average around $600. The price factors are the location of a property, its size, and its condition. Therefore, no appraisal fee should ever be attached to a percentage of the home's value.
Attorney Fees
You may hire a real estate attorney to finalize the title transfer for your home purchase. The expense of having a legal expert look over your paperwork is a part of this fee.
Protection from any third-party claim to your home comes with title insurance. The company ensures the seller has a right to the title of the home they are selling. A search for liens, bankruptcies, and other factors is a part of this fee.
Title search, settlement, and lender's title insurance are a part of these fees. Therefore, examining public records is vital to the process.
Costs to close the actual loan are multi-faceted, and they are all critical to having the most successful experience possible.
Prepaid Items and Reserves
A new homeowner has some new responsibilities and makes a monthly mortgage payment, but there are also property taxes to consider. In addition, fees paid to the state, county, and local authorities through taxes are due at closing. These fund local utility maintenance the upkeep of roads and public schools and can vary depending on the location of your home.
As a potentially large cash payment, property taxes are vital to consider in closing costs. Language in the contract will decide if the buyer or seller pays property taxes. Buyers can incentivize sellers with offers to pay the property taxes, and sellers can offer to pay a buyer's portion to help close a deal.
Dividing the total property tax due by 12 will provide a monthly amount, or dividing the total by 30 will give you a per-day figure. It's essential to know these fees, along with prepaid interest, going into the home buying process.
Many loan types require payment of homeowners insurance premiums in advance. The amount can benefit the buyer since it may offset the price at signing. However, some buyers will look to have the seller cover their premium at the time of closing.
If you're not buying a home with cash, a lender typically requires payment of the premium for one year's worth of homeowners insurance before or at closing.
How to Pay Cash to Close
Choosing the more secure method to pay cash to close is preferable. A cashier's check, wire transfer, or certified check are excellent options. Other methods may be accepted but are not solid recommendations for this process, such as credit or debit cards and personal checks.
A cashier's check certified by your bank offers security and allows a lender to cash your check. From there, the bank will withdraw the money from your account and allow you the peace of mind of watermarks and signatures to prevent counterfeits.
Certified checks are also a strong recommendation since your local bank or financial institution has certified that you have the money to cover the cost. The amount is locked into your account until the check has been cashed.
Wire transfer also provides a secure and speedy option to pay cash to close. Electronically sending money to your lender by way of your bank can be done in person, online, or even over the phone. Your mortgage lender's Society for Worldwide Interbank Financial Telecommunication (SWIFT) address will be necessary for this method.
Cash, credit or debit cards, and personal checks are also viable in some cases but can raise questions about the money's origin. Additionally, there are security considerations that these methods do not address quite as stringently as the others stated here.
Closing Costs vs. Cash to Close
Closing costs are what you pay your mortgage company to close your loan. Cash to close is the total fees described above, including closing costs. You will need cash to complete at the time of your real estate purchase to finalize the process.
Take time to go through this process thoroughly to ensure you are fully equipped for your big day. Closing day is a time of celebration and can be a massive success when planning goes well. Having full knowledge of your closing disclosure and all the amounts you will pay during closing is an integral part of the process of becoming a homeowner. Your real estate professional should be able to advise you every step of the way.
