What is Cash to Close?
You may have heard the phrase “cash to close” as you start your search for a new home. This article will break down the components of what defines this but basically this is the amount of money you will need to buy a house and close with a mortgage. The three components are down payment, closing costs and taxes and insurance.
With nearly every type of mortgage there will be a required amount of money you need to put down on the purchase of a home. Many consumers believe they need to come up with 20% or more for a down payment. This is just a myth. The average down payment on a mortgage in the past year is somewhere between 6-7%. The down payment can amount to thousands of dollars and historically is a major hurdle for a consumer but wait, there are low down payment options.
Conventional mortgage offer programs for as little as 3% with certain requirements. FHA mortgages have as little as 3.5% down for their offerings and for those consumers who are military veterans or immediate family are eligible for VA loans offering zero down programs. It is noteworthy at this point that whenever you put less than 20% down mortgage insurance or PMI will be an additional requirement and another component to your monthly payment.
The second component of your cash to closing are closings costs. These contain items such as discount or origination points, lender fees (Processing and Underwriting Fee) and third-party fees such as appraisals, title company fees, credit report fess amongst others. On average these fees should be about 2 – 5% of the home’s purchase price so budget accordingly.
Property Taxes & Homeowner’s Insurance
The third component of cash to close are homeowner’s insurance and taxes. Property taxes will be collected at closing for the anticipated tax bills due to the local municipality and the county. There are typically two tax bills in Michigan related to this. If you are setting up an escrow account, you can budget 13 months of insurance and taxes which will be collected. A portion of this will fund the initial escrow account and the other portion to reimburse the seller’s (prorate) for taxes they have paid forward. Tax bills in Michigan pay forward for a calendar year. Your first year of homeowner’s insurance will need to be paid in advance of the closing date and you will need to fund the initial escrow account with 1 – 2 months of the premium.
There are many questions you may have, so it is best to consult your mortgage professional at Hall Financial to gain the best mortgage advice.
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.