When you buy a new home, realtors throw a lot of phrases around that are confusing. One of them is “Cash to Close.” Another is “Closing Costs.” It’s easy to think that these terms mean the same thing, but they don’t. So precisely what does “Cash to Close” include and how will you know if you have enough money to close on your new home?
The way to be prepared for closing is to study your closing disclosure documents before you show up to closing. These documents list everything you will pay in a line-by-line item format. By law, your closing agent, attorney, or lender must give you a copy of your Closing Disclosure three business days before closing. This all-important document compiled jointly by your title company, your lender’s escrow officers, your attorney, and real estate agents is your guidebook for closing.
Get in touch with your closing agent ahead of time to ask for your closing disclosures. You deserve a fair amount of time to look them over before attending the closing and make any necessary changes with your attorney.
Your closing disclosures will spell out how much you have already paid toward your total payout and compare this with your loan estimate. They will also note how much you need to pay for closing costs and how much cash-to-close you will need.
What is Cash-to-Close?
Cash-to-close is the total amount you pay on the day you close on your new home. Cash-to-close amount includes:
- Your Down Payment
- Any Earnest Money
- All Closing Costs
Cash-to-close is a complicated equation that “represents the total amount of money that you will need to close on your new home, so it’s not limited to just your closing costs. It includes your total closing costs minus any of those which will be financed or rolled into the overall loan amount. Additionally, the calculation includes your down payment and subtracts the earnest money that you already submitted with your original contract. Any seller credits, refunds for overpayments, or any other credits will also be present here.” (1)
However, closing costs are a vast and detailed list of expenses. Let’s look at the particulars of closing costs so that there are no surprises at closing.
What are Closing Costs?
Mortgage companies make their bread and butter by charging fees at closing to cover the cost of finding your loan and writing up your loan closing.
Lenders will charge an application fee to process your mortgage. This cost generally represents the initial administrative charge of processing your application.
Loan Origination Fees
There are fees from lenders for processing and underwriting the loan. The bank uses an underwriter to check your credit history and approve you for a loan. These costs depend on where you live, what type of loan you have, how much your total loan is for, and how much you are putting down.
Mortgage points are fees that go to the lender at closing to buy you a lower interest rate for your home loan.
Private Mortgage Insurance (PMI)
Lenders expect you to put 20% down on a home loan so that you are vested in the property. If your downpayment is less, they will make it a condition of the loan for you to buy private mortgage insurance (PMI). PMI is a monthly charge and covers the cost of loss for the lender in case of your future default.
Most contracts allow you to stop paying PMI once you have paid off 20% of the principal part of your loan. Some contracts, however, continue to charge PMI for the life of the loan. This is a point you may negotiate with your lender before closing.
Attorney or Settlement Fee (Closing Fee)
In some states, a legally required real estate attorney finalizes the title transfer. The law does not require an attorney in Texas, but it is always helpful and cost-effective to have someone who knows the law on your side. A closing attorney can save you thousands of dollars just by reading your contracts and letting you know where you can negotiate.
If you use an escrow agent from your lender, this is called a settlement fee.
These are charges from the County Clerk for transferring property deed information from the seller to you.
Title Search / Title Insurance
The title company you choose to perform your closing does a thorough search of your title for any liens or encumbrances that could affect your future enjoyment and ownership of the property.
The fee listed generally covers the research and title insurance for your house as long as you are the owner. The amount you pay depends on the value of the property.
You would pay this fee at closing if you had an appraiser come out and assess the property’s worth. Sometimes your lender will order the appraisal as a condition of approving the loan. Lenders are careful not to loan more money than the home’s fair market value.
Homeowners insurance and Property Tax
Usually, you pay the first year of your homeowner’s insurance and six months of your taxes at closing. Each district in Texas assesses homes for tax value. Check with your clerk of court to check for any discounts you may have for Texas homestead exemptions, disabilities, or over 65 years of age.
Buying a new home is often full of unexpected charges that are difficult to pay. The closing costs section of your closing disclosure is full of examples.
However, with the right professionals on your team, you’ll save money and resources. In addition, with your knowledge about the different kinds of fees, you’ll be better equipped to negotiate them and get a better deal.
If you need help going over a real estate contract, at Jarrett Law, we specialize in everything related to property ownership. From disputing a closing contract to handling your HOA, buying a home or selling, we’ve got you covered. Our focus on real estate law gives us insights into whatever you are facing. So contact us for a free consultation and find out how we can start helping you today.