Understanding & Estimating Cash to Close

When you’re buying a house, there are a few things you’ll need to close the deal, including something called “cash to close”. Sometimes also referred to as “funds to close”, cash to close is the amount of money required to complete the transaction of buying a house. This term doesn’t refer to actual cash — and in fact, it’s not a good idea to bring actual cash as it often won’t be accepted. Check with your lender or realtor as to what forms of payment they’ll accept; you may need to bring a notarized cashier’s check, and that’s not something you want to be scrambling to put together last minute on closing day.

Cash to Close vs Closing Costs

Closing costs and cash to close are similar terms for two different things. Closing costs are actually part of the cash to close amount, which can include other fees and expenses related to your home purchase. There are several kinds of fees that can be included in your closing costs, like property-related fees, loan-related fees or private mortgage insurance (PMI).

Property-related Fees

Some home purchases require the buyer to pay for things like inspections and appraisals, which you may have already paid for and might not be included in your closing costs. You may also be asked to join a homeowners association — these organizations usually charge a monthly assessment fee added to your mortgage payments every month.

Loan-related Fees

The mortgage itself can come with a lot of extra fees when it comes time to finally close on the house. There will usually be an application fee that covers things like credit report checks and the cost of administration. If your state requires an attorney to be there for the closing, you’ll also have to pay for that. A loan origination fee is usually charged, which is the cost of preparing, evaluating and processing your mortgage. This can cost around 0.5 percent of the loan amount.

How to Estimate Your Cash to Close

The general formula for calculating your cash to close is fairly simple. Your down payment plus your closing costs make up the majority of what you need to close on a mortgage, minus any credits from the seller or earnest money you’ve already deposited. Remember to include any fees in your closing costs as part of your calculations. A good rule of thumb to estimating closing costs and cash to close is to expect them to cost between 2 to 5 percent (Opens in a new tab) of the home’s price.

Cash to Close Fees

There are a number of fees that make up the cash to close amount. They include:

Down payments. The down payment is the amount of money you pay down on the house outside of your loan amount. This contributes to the cost of the house and thus reduces your loan amount.

Origination charges. This is the fee your lender charges for processing your loan.

Taxes. Usually, the property taxes are pro-rated so you’re only paying your share for the amount of time you own the home in the year you buy it. Afterward, your property taxes will most likely be paid through an escrow account.

Prepaid items. Prepaid expenses or items — also called prepaids — include the private mortgage insurance cost, hazard insurance and other assessment expenses. Some of these are put into escrow, like the PMI and other insurance costs.

For certain kinds of loans, you may be able to negotiate not having to pay any closing costs. But for these types of loans, you still may need cash to close. The down payment and extra fees like a homeowners association cost may make up the cash to close amount, so be sure to include those in your calculations.

Don't Forget Homeowners Insurance at Closing

In addition to closing costs, you will need proof of insurance during your home purchase. Connect with an insurance agent to find the best homeowners policy for your needs.