Understanding Cash to Close and How to Prepare for Closing Day

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A home can be one of the most exciting purchases — and also one of the most complicated. 

It may already feel like a demanding task to focus on all the required details of buying a home, like square footage, school district, inspections, and appraisals. It’s therefore common for buyers to encounter confusion about what to expect on closing day.

Closing day comes with several requirements. Of them, a phrase known as “cash to close” is the one with most potential to blindsight buyers. Cash to close means the amount of money you must bring with you on the closing day. 

But it’s not just your down payment or the final closing costs; cash to close includes every potential day-of cost, including credits and points. Keep reading to learn what cash to close is, how it differs from closing costs, and what form of payment you can use.

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

Closing costs and cash to close are two common phrases to describe the amount you need to bring with you to the closing table. Before you buy a home, it’s important to understand the difference between the two.

“The difference between cash to close and closing costs are that closing costs are the fees that are required in order to get the loan (or perform the closing if the buyer is paying cash), and cash to close encompasses your down payment as well,” said Katie Messenger, a Kentucky-based Realtor with Keller Williams.

What Are Closing Costs?

Closing costs are the fees and administrative costs associated with buying a home and taking out a mortgage. Most closing costs are required as a part of taking out a home loan.

“If someone is paying cash, the bulk of those go away, and they basically are paying for the attorney to prepare docs and have the deed recorded, as well as the owner’s title policy,” Messenger said.

Common closing costs include:

  • Appraisal fees: An appraisal is a third-party estimate of the value of the home. Most lenders require an appraisal to ensure the home’s value is worth what the loan amount is based on.
  • Attorney fees: Depending on where you live, an attorney may be required to complete the title transfer. If this is the case in your state, then the attorney fees will be a part of your closing costs.
  • Title insurance: When you purchase a home, you generally also purchase title insurance to ensure there are no third-party claims to your new home. Lenders usually require title insurance on properties they’re writing mortgages for.
  • Origination charges: Origination charges are those that lenders charge to originate and process your loan. These generally include the application and processing fees.
  • Private mortgage insurance: If you buy a home with less than 20% down, you may be charged private mortgage insurance (PMI), which covers the value of the house if you default. For certain loans, your first PMI payment may be due at the time of closing.
  • Fees specific to government loans: Government-backed loans like FHA loans, VA loans, and USDA loans may come with their own fees associated with them. For example, FHA loans require an upfront mortgage insurance premium, while VA loans require a VA loan funding fee.

What Is Cash to Close?

While your closing costs cover the fees and administrative costs associated with buying a home, the cash to close encompasses all the money you’ll need to bring with you on the closing day.

“Cash to close refers to what you pay to actually purchase the home,” said Cliff Auerswald, president of All Reverse Mortgage, Inc. “It includes the mortgage down payment and subtracts any credits you may have acquired during the home-buying process.”

Here’s a breakdown of all that cash to close may summarize:

  • Closing costs: Cash to close includes all of the money you’ll need to bring with you on the closing day, including your closing costs. 
  • Down payment: Your down payment is the percentage of the purchase price that you’ll be paying upfront. The down payment usually represents the largest portion of the cash to close. In most cases, it can be as low as 3%, with some people putting down up to 20%. Certain government loans like VA and USDA loans don’t require a down payment at all.
  • Mortgage points: Points are fees paid to the lender to “buy down” the interest rate on a mortgage. One point generally lowers your interest rate by 0.25% and costs 1% of the price of the home. The cost of any mortgage points is also included in your cash to close.
  • Credits: Lender credits are similar to mortgage points, but work the opposite way. Lender credits allow you to reduce your closing costs in exchange for a higher interest rate. If you receive lender credits, they’ll be reduced from your total cash to close.
  • Earnest money: When you make an offer on a home, your real estate agent may encourage you to offer earnest money as a way to show the seller you’re serious. The earnest money is paid upfront and usually goes into an escrow account until the closing. If you’ve paid earnest money, it will be subtracted from what you owe on the closing day.

How Cash to Close is Calculated

“Cash to close is calculated by adding the amount the buyer is putting down plus the total of all the fees mentioned above (minus any lender or seller credits),” Messenger said. “For easy math, if a buyer is purchasing a home for $250,000, putting $25,000 down, and closing costs are $5,000, then their cash to close is $30,000.”

You can find your cash to close in your Closing Disclosure, which is a five-page form that provides all details of your mortgage loan.

Pro Tip

Before your home closing, be sure to read through your Closing Disclosure to make sure you fully understand how much you’ll have to bring with you on the closing day.

The amount of your costs to close can vary quite a bit depending on the size of your down payment. Closing costs generally range from 3% to 5% of the loan amount, while down payments often start at 3% and go up to 20%, with the median being 6.6%. Therefore, average costs to close would likely range from 9% to 12% of the loan amount.

If you have questions about your cash to close or closing disclosure, you can speak with your mortgage lender.

What Form of Payment Can You Use?

The payment method you can use for your cost to close may depend on where you live and the title company you use. Often the only payment methods allowed are certified checks and wire transfers. In other cases, you may also be able to use cash, debit card, a cashier’s check, or even a personal check.

“Wire transfers are one of the safer options when it comes to paying your mortgage,” Auerswald said. “It’s transferred electronically from one bank to another or from one account to another. Wire transfers also don’t require your presence, so you can be at work while the transaction takes place. Be careful to make sure you know exactly where you’re sending your money, however, since wire transfers are non-reversible.”

While certified checks and cashier’s checks have previously been the most common payment methods for cash to close, more title companies are now requiring wire transfers.