Closing Costs vs. Down Payments
Are closing costs and down payments the same thing? They may seem like it, but they’re not. That down payment on a home is not the same as the money you’ll need to pay for closing costs, though they both help you buy a home. When you’re shopping for a house, you may be focused more on gathering the money you’ll need for a down payment than you are worrying about coming up with the cash to cover closing costs. But both play a key role in a successful home purchase.
What’s the difference between closing costs and your down payment? Closing costs cover fees, taxes and administrative expenses required to process the purchase of your home while your down payment usually consists of two parts. The first part of the down payment is the earnest money, or the cash you put in escrow when you first make an “offer to purchase” on the home. The second part is the remainder of the down payment which you give the lender when you make the purchase at closing.
How Do Down Payments and Closing Costs Work Together?
The down payment and closing costs have a few things in common. Do closing costs include down payment monies? Not usually. Typically, you as the homebuyer will need to produce the down payment cash from your own savings, though this is not a hard-and-fast rule. But they are separate entities and each perform a different function when purchasing real estate.
The down payment. The money that makes up the down payment must be paid during the home buying process. Whatever money is paid out as either earnest money or a down payment is deducted from the purchase price of the home. And the amount that remains will typically get folded into your loan.
Keep in mind, depending on the type of loan you have, you may be required to pay private mortgage insurance (PMI) if you pay less than 20% down. When that’s the case, a PMI charge will be prorated into your closing costs. This is often the case with FHA loans which only require a down payment of 3.5% of the purchase price. You’ll also pay a monthly PMI fee until 20 percent of your loan is paid. This fee can add thousands to the cost of the loan in additional expenses.
The closing costs. These are an assortment of taxes and fees charged by governmental entities, local municipalities, and administrative groups handling your loan and processing your real estate purchase paperwork. They’re very different from the down payment. Closing costs will usually include fees and charges relative to the type of loan you have and the services required to process that specific loan. FHA loans and down payments allow most closing costs to be included in the loan which can be very helpful if you don’t have the cash required to close.
When Do You Pay the Closing Costs and the Down Payment?
The closing costs are paid at closing, and the down payment is due at closing. Though both the down payment and closing costs can be paid via the same check.
Do Closing Costs Include a Down Payment?
No, your closings costs won’t include a down payment. But some lenders will combine all of the funds required at closing and call it “cash due at closing” which bundles closing costs and the down payment amount — not including the earnest money. It’s also important to note that closing costs do not count towards the minimum down payment amount required by certain loan types.
Is the Down Payment Included in the Loan Amount?
Your down payment is not included in the loan amount. Both parts of the down payment are deducted from the purchase price — what remains is the loan amount. When making a home purchase, the down payment is the total you’ll be required to pay to satisfy the requirements of the loan.
Are Closing Costs Based on the Loan Amount or the Purchase Price?
Closing costs can be flat rates and charges are calculated off of the purchase price. Because each state and local municipality has their own specific set of charges, they can vary one to the next. Your lender’s charges and other fees are typically based off the loan amount.
For instance, a $200,000 purchase price will usually require a 3.5% ($7,000) down payment. Some lender fees due at closing may be based off of loan amount ($193,000) and other county and state fees will be based off the full purchase price. 3.5% is a typical FHA loan down payment and closing costs will include a private mortgage insurance payment in addition to other related fees.
How to Pay the Down Payment on a House at Closing
Usually, a certified check or a cashier’s check is used to cover the down payment at closing. Your title company or lender will usually get you a total amount due in the days before closing.
Remember to Budget for Insurance Costs at Closing
As you’re building your strategy to afford the purchase of your home and are gathering the funds required for closing, make some time to connect with your American Family Insurance agent. You’ll find they’re experts in crafting a homeowners policy that fits the needs of your budget and your new home.