The topic of cash to close vs closing costs revolves around a great deal of misinformation. Many people think it’s a hot topic, which is why the cash to close vs. closing costs debate is gaining traction, but nothing can be further from the truth.
It would be better to phrase it as cash to close and closing costs. After all, these two terms are dissimilar but not entirely unconnected. This hot topic, however, is not as controversial as it may seem. The terms have a lot to do with loans and real estate. Some even see one as an implication of the other.
Nevertheless, by the end of this short read, you will be familiar with the concepts of cash to close, closing costs, and everything there is to know about them.
- Contrary to popular belief, closing costs and cash to close are not two terms that reference the same thing.
- Both terms are an essential part of the real estate world that include many important aspects of real estate investment connected to loans, transferring property, and administrative costs.
- It’s important to understand the difference between the two in order to avoid future misconceptions.
Before we start dealing with these terms individually, here’s who they would interest:
Homebuyers – anyone currently purchasing a home or planning on doing so should know what these terms entail. After all, they are crucial to both the process and, as a result, the buyer. Buying a home is accompanied by many worrisome technicalities, so having these two concepts covered can save you a great deal of effort in the long run.
Homeowners – those who own homes, and are looking to sell them in the near future, should be more than familiar with these terms. After all, part of having a successful sale is based on knowing your buyer, and you can’t do that if you don’t even know how to sell your real estate properly.
Regardless of whether you are part of the former or the latter, or even none of the abovementioned, it certainly won’t hurt to know a thing or two about the process of dealing with real estate. Cash to close vs closing costs – let’s get to it!
Closing costs are the fees needed to close on a home loan. These fees come about because you need to contact a mortgage company to initiate the process. As you may have guessed, closing costs depend on many variables, like the type of loan or the amount of money borrowed.
Still, some standard fees are almost unavoidable, such as:
Appraisal and attorney fees
You need to know how much your home of choice is truly worth, or you risk overpaying. That’s why appraisal fees are a necessity. In fact, you might not even be able to get a loan without having the housing appraised. Similarly, attorneys rack up fees because you can’t finalize the transfer without one.
Title insurance and application fees
Title insurance fees are paid in order to ensure that the person you are buying from has the right to sell the property. Although it’s always better to be on the safe side, you don’t technically have to look into the property and the previous owner. As for application fees, if borrowing money, you simply can’t avoid them.
That’s the first part of the cash to close vs closing costs discussion. Now, we cover the term cash to close.
Cash to Close
In short, cash to close refers to the amount you pay to finalize the closing process and successfully purchase real estate, such as administrative costs. The step itself is crucial to real estate investment and could help you understand why wedge deals are becoming a lucrative investment option.
Overall, the term includes:
Closing costs and down payment
As we have already covered the main closing costs, we’ll focus on down payments. The term down payment references the amount you have decided to pay upfront. This could be anything between 3% and 20%, although conventional loans often require a rate of approximately 20%.
Mortgage points and credits
To avoid confusion, mortgage points are essentially discount points. This means that they are a type of fee that the buyer pays to a given lender in order to reduce interest rates. In general, these fees are a part of the concept of cash to close. Credits, on the other hand, are the exact opposite. You can use them to reduce closing costs by increasing interest rates.
And that would be the second part of the cash to close vs closing costs. At this point, it should be clear that there is some overlap between the two terms, but they don’t refer to the same thing.
As it turns out, cash to close vs closing costs is a discussion with few overlapping points. Nevertheless, these two seemingly similar yet fundamentally different points are important for anyone looking to dabble in real estate.
Keep in mind that the first term, closing costs, refer to the fees needed to close on a home loan. The second term – closing costs, is used to reference the amount of money required to finalize the closing process and successfully purchase real estate.
Knowing this, you are ready to start delving deeper into the world of real estate investments. At the very least, you will not be confused by the mention of these two terms ever again!