Closing costs and cash to close are two terms used to explain how much money you’ll need at the closing table. It’s critical to know the difference between the cash to close vs closing costs before purchasing a home.
Generally speaking, closing costs are the charges that are needed in order to get the loan whereas cash to close also includes your down payment as well. Here is the detailed breakdown of cash to close vs closing costs, what each comprises of, and the complete difference between the two terms.
Cash to Close
The term “cash to close” refers to the overall amount of money you’ll need to close on your property, not simply your closing expenses.
It is important to remember that your closing fees and administrative expenditures are only a portion of the total cost of purchasing a house; you will also need cash to close.
Cash to close references to what you pay to actually acquire the home. A loan down payment and any credits you may well have accrued during the home-buying transaction are included in this figure.
Here’s an analysis of all that cash to close is all about:
- Cash to close comprises all of the funds you’ll have to carry with you on your closing day, plus your closing costs.
This is the proportion of the purchase cost that is due at the time of purchase. - The down payment generally represents the largest amount of the funds to close. In most circumstances, it can be as low as 3 percent , with some people who put down 20 percent . VA and USDA loans, for example, don’t require any type of down payment. Conversely, hard money lenders require down payment of 10-30 percent of the purchase price as down payment.
- Payments made to the lender to “buy down” the rate of interest on a loan are known as “points.” In most cases, one percentage point decreases your mortgage rate by 0.25 percent while costing 1% of the home’s purchase price. The amount of any loan points is already included in the cash to close.
- Similar in concept to loan points, lender credits are used in the opposite manner. In exchange for high rate of interest, you can get a lower closing cost with a lender credit. Your closing costs will be lowered if you get lender credits.
- Your realtor may urge you to offer initial money as a means to show the seller that you’re serious when making an offer on a home. It is customary to pay the earnest funds up advance and have it held in escrow till the transaction is completed. Earnest money will be deducted from your closing costs if you have paid it.
Using hard money loan for cash to close
Hard money loans are not just a source of funding for investors with a poor credit background. It can help you regardless of your credit score. Hard money loans interest rates range from 7% to 12%. However, exchange of high interest, you can get lower closing cost with lender credit.
Closing Costs
Closing costs differ based on the down payment, type of loan, state, and amount borrowed. The following are some of the most typical costs you could encounter.
Fees for appraisals: An appraisal is a competent third-party evaluation of the value of the home you’re purchasing. Appraisals are required by lenders to confirm that the residence is worth the amount they are giving.
Attorney fees: To complete a title transfer, you may need to employ a real estate lawyer in some states. The lawyer charge pays the cost of having your documentation reviewed by a legal expert.
Title insurance: coverage provides you against third-party lawsuits on your new property’s title. It also ensures that the individual selling you the property has the requisite title rights.
They also check for bankruptcies, lawsuits, as well as other difficulties that might result to lose your home. You just have to invest for title insurance once in the closing process, and you’re protected for as longer as you own the property.
Application fees: Lenders impose application fees in order to execute your mortgage application.
Origination charges: Mortgage lenders impose origination fees in order to underwrite your loan.
Fees for USDA, FHA, or VA loans: If you take a government-backed loan, you may be required to pay a charge to the lending agency. These payments help to keep the programs running by covering administrative costs.
- FHA loans need a 1.75 percent upfront mortgage insurance payment as well as a monthly cost.
- VA loans Based on how much you draw loan and your service records, a one-time VA funding charge may be required.
- USDA loans A 1% upfront guarantee charge and a 0.35 percent yearly fee are required for USDA loans.
Pest inspection fee: In some areas, a pest inspection is required before your mortgage can be closed.
Conclusion
You now understand the distinction between closing costs and cash to close, and you’re aware that your closing disclosure will detail the total sum you’ll pay at the time of your mortgage closing.
You will see a drop in your cash to close if you have already paid your down payment or closing charges. Always keep extensive records so you may talk to your lender about any discrepancies.
At 14th Street Capital, our team comprises of real estate investors that have turned into hard money lenders. Having been in our client’s shoes know what it takes to be successful in the real estate industry. Whether you need the funding to close on the deal or expert guidance to be successful in real estate, you can count on us for being there every step of the way.