For a home buyer, a major source of confusion is what the term cash to close encompasses. The total cash to close (CTC) is the sum of money needed to complete the transaction. This sum can be broken into three parts: down payment, closing costs, and prepaids. Understanding how much you need to have available helps you determine whether a purchase is within your budget. This also helps to make sure there are no surprises at the closing table! 

Down payment

Down payment is the amount of money you put toward the home when you buy it. The down payment on the property will be reduced from the sales price to determine the amount you are borrowing. As a buyer, you have several options for down payment amounts depending on your loan type. Some loans offer 0%, 3%, and 5% down options, while others encourage you to put down 20% or more down. Licensed mortgage brokers can help you determine the best loan program and down payment amount for your purchase price and budget.

Closing Costs

Closing costs are exactly what it states, costs to close your mortgage. Whether buying, selling, or refinancing, you will always have closing costs to pay. Closing costs will vary based on your loan amount. However, they don’t always have to come out of your pocket!  Closing costs include but aren't limited to appraisal fees, loan origination, discount points, underwriting, processing fees, and title fees.  Basically, this is how you pay all the people who have helped you finance your home. 

Prepaids

Prepaids are the costs that you are prepaying for your mortgage. For example, this is where you will be paying for your first year of homeowners insurance, a few months of taxes, and also prepaid interest for the number of days left in the month of closing. This portion of your cash to close will be held in an escrow account, which is a free service on behalf of the lender that lowers the risk associated with the loan. This way you will always have your taxes and insurance paid in a timely manner.