We believe that all clients need to fully understand what it takes to close on their home loan. Yet the “Cash to Close” has consistently provided confusion in all borrowers’ minds.
There are 3 main components that make out your cash to close:
(Say we have a $150,000 purchase price, putting 10% down).
- Down Payment – $15,000 (Can range from 3% to 20% down or more)
- Closing Costs – $2,500 (Usually between $2,200-$3,000)
- Prepaid Items – $4,613
- TOTAL – $22,113
Prepaid items are certainly the most confusing, and can be divided up into 4 categories:
- Escrow Account: Lender will establish an account to pay your property taxes and home owners insurance ONLY IF you put less than 20% down.
- Property Tax Pro-rations: In Southeast Michigan, property taxes are paid 1 year in advance, so you must reimburse seller for taxes already paid. *Required regardless of down payment amount
- Home Owners Insurance: 1st year policy is always paid in advance and paid 2 weeks before closing. *Required regardless of down payment amount
- Prepaid Interest: You are required to pay for the interest on the remaining days left in the month you close.
In our example, the $4,613 can be broken down into:
- Escrow – 7 months worth of property taxes and 2 months worth of home owners insurance for a total of $1,900
- Tax Pro-Rations – 6 months worth of taxes totals $1,500
- Home Insurance – Premium would be $900 per year
- Prepaid Interest – Say we close on the 15th of the month, you would have to pay the remaining 15 days worth of interest at closing, a total of $313.
Keep in mind the tax pro-rations usually are the most confusing, and some lenders will not include this as it is not a lender related amount. Hope this clears things up.
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