‘Cash to close’: What it means and how it works

When you buy a home, the closing is the final step that makes it official. In the process, you’ll pay several costs: Not just the usual outstanding closing costs but also the remainder of your down payment, the first installments of recurring expenses like property taxes, and more. All of these costs comprise what’s known as your “cash to close.”

What is ‘cash to close’?

Cash to close is literally the amount of cash you’ll need to close on your home purchase — the total sum needed to close your mortgage loan and complete the transaction. Your cash to close includes:

• Closing costs: Both buyers and sellers will pay closing costs of some kind — for buyers, they generally include fees related to the mortgage financing, such as loan origination, credit check, title services, home inspection and appraisal and a recording fee. You might have already paid some of these costs; if so, you’ll be responsible for the outstanding charges on closing day.
• Remaining down payment: When you signed the purchase agreement for your home, you likely made an earnest money or initial deposit, which has been held in escrow. This money ultimately goes toward your full down payment, the remainder of which you’ll pay at closing. Let’s say you’re making a 10 percent down payment on a $350,000 home, or $35,000. If the contract required 3 percent in earnest money, you’d pay $10,500 of that $35,000 as a deposit. At closing, you’ll pay the remaining $24,500.
• Per diem mortgage interest: Per diem interest is the amount of interest you owe between the day you close and the day you begin making payments on your mortgage, typically on the first of the following month. For example, if your closing is July 20, you’ll pay prorated interest for the 11 days prior to your first monthly payment on August 1.
• Prepaids: Prepaid charges cover a portion of your homeowners insurance, property taxes and HOA dues (if applicable). They’re usually held in escrow by your lender or servicer and distributed as needed.

Cash to close vs. closing costs

Don’t be confused by the similarity of these two homebuying terms, which are sometimes used interchangeably but don’t mean exactly the same thing. Think of closing costs as just one of several components in cash to close — the other components are prepaid expenses and the remaining portion of your down payment. “Cash to close is a much bigger number than just the closing costs,” says Jeff Lazerson, president of Mortgage Grader in Laguna Niguel, California.

How to calculate cash to close

At least three business days prior to your closing date, your mortgage lender will provide you with a closing disclosure. This document itemizes all the funds you’ll need to pay at closing, totaled up under the heading “Cash to Close” at the bottom of the first page.

Before you get the closing disclosure, however, you can calculate your estimated cash to close total based on the deposit you already made and the other costs outlined on your loan estimate, a document you would have received when you applied for the mortgage. While the loan estimate isn’t a final tally of cash needed to close, it can help you prepare for what you’ll need to pay. You can also ask your real estate attorney or settlement agent to give you estimates.

How cash to close is paid

Cash to close funds are paid via wire transfer, or with a cashier’s check or certified check from your bank. It’s smart to take extra care with a wire transfer: Mortgage wire fraud is often initiated through a legitimate-looking email, so take the additional step of confirming the wiring instructions with your attorney or settlement agent over the phone before sending the funds.

“Once the money is diverted, it’s very difficult to get it back,” says Jennifer Davidson, co-founder of Prosper Escrow in Laguna Hills, California. “You may need to get your bank’s fraud department or even the FBI involved.”

FAQs

• What is the meaning of cash to close?

  The term “cash to close” can be taken fairly literally: It’s the amount of cash you’ll need to close on your home purchase, or the total sum needed to complete the transaction.
  

• Is cash to close the same thing as closing costs?

  No. Closing costs are just one of several components that go into your total cash to close amount. Other components included in cash to close include the as-yet-unpaid remainder of your down payment and any prepaid fees.