You've saved for the down payment.
You found the house.
You're ready to buy.
Then someone says:
“Don't forget about closing costs.”
And suddenly you're wondering:
Wait...how much more money do I need?
This surprises a lot of homebuyers because your down payment, closing costs and cash to close are three different things.
Understanding the difference before you start shopping can save you from a very unpleasant surprise later.
First: Your Down Payment Is NOT Your Closing Costs
Let's say you're buying a $500,000 home and putting 10% down.
Your down payment would be:
$50,000
But that doesn't necessarily mean $50,000 is all you'll need.
There are also costs associated with obtaining the mortgage and completing the real estate transaction.
Those are generally referred to as closing costs.
The Consumer Financial Protection Bureau describes closing costs as the upfront costs of obtaining the loan and transferring ownership of the property, excluding your down payment.
And then there's another number:
Cash to close.
That's the actual amount you ultimately need to bring to closing after accounting for things such as your down payment, closing costs, deposits you've already made, seller credits and other adjustments.
Those distinctions matter.
How Much Should You Budget for Closing Costs?
There isn't one universal percentage that works for every transaction.
Closing costs vary based on things like:
Purchase price
Loan amount
Loan program
Interest-rate option
Property location
Property taxes
Homeowners insurance
Title and settlement costs
Whether you're establishing an escrow account
You'll often see general rules of thumb online.
They're useful for initial planning, but I don't want a buyer making a major financial decision based solely on a percentage.
Once I know the property, loan structure and closing date, I can give you a much more meaningful estimate.
What's Actually Included in Closing Costs?
This is where things can get confusing because not everything listed on a Loan Estimate is really the same type of expense.
I prefer breaking the numbers into a few buckets.
1. Loan Costs
These are expenses associated with obtaining the mortgage.
Depending on the lender and loan, they can include:
Origination or lender fees
Processing or underwriting fees
Appraisal
Credit report
Discount points, if you choose to pay them
Other mortgage-related services
This is one area where comparing lenders becomes important.
But don't just compare one big number at the bottom of the page.
We'll come back to that.
2. Title and Settlement Costs
Buying a home requires other professionals and services beyond the mortgage company.
Depending on the transaction and location, these can include things such as:
Title-related charges
Settlement or closing services
Recording fees
Government charges
Some of these costs may vary based on where you're buying and which providers are used.
3. Prepaids
Here's a category buyers frequently mistake for lender fees.
Prepaids aren't necessarily a fee you're paying the mortgage company.
For example, you may need to pay your first year's homeowners insurance premium at closing.
You may also pay interest from the day your mortgage funds through the end of that month.
The CFPB specifically identifies prepaid interest and homeowners insurance as common prepaid items appearing on mortgage closing disclosures.
You're going to have these expenses as a homeowner regardless.
You're simply paying some of them upfront.
4. Initial Escrow Deposit
If your mortgage includes an escrow account for property taxes and homeowners insurance, money may need to be deposited into that account at closing.
Again, I don't look at that the same way I look at a lender fee.
It's your money being set aside to pay future expenses associated with owning the home.
This distinction becomes important when comparing mortgage quotes.
Closing Costs vs. Cash to Close
This is probably the most important distinction in this entire article.
Imagine your transaction looks something like this:
Purchase price: $500,000
Down payment: $50,000
Closing costs and prepaids: $12,000
At first glance, you might think you need:
$62,000
But suppose you already deposited $5,000 of earnest money.
That money generally receives credit toward the transaction.
Now suppose you've also negotiated a seller concession toward allowable closing costs.
Your actual cash to close could be substantially different.
That's why I don't want buyers asking only:
“What are my closing costs?”
I want to answer:
“How much money will I actually need to complete this purchase?”
Can the Seller Pay Your Closing Costs?
Depending on your loan program and transaction, yes.
This is called a seller concession or seller credit.
For example, instead of negotiating only on price, a buyer might negotiate for the seller to contribute money toward allowable closing costs.
On eligible conventional Fannie Mae financing, seller and other interested-party contributions can be used toward allowable borrower closing costs and prepaids, subject to program limits. Those limits vary depending on factors such as occupancy and loan-to-value ratio.
Different loan programs have different rules, so the strategy needs to be structured correctly.
But seller concessions can be incredibly useful.
A $10,000 Price Reduction vs. $10,000 Toward Closing Costs
Here's something many buyers don't consider.
Suppose you're negotiating on a $500,000 home.
You might ask the seller:
“Will you reduce the price by $10,000?”
Or, depending on the transaction, you might negotiate:
“Will you contribute $10,000 toward my allowable closing costs?”
Those two strategies can have dramatically different short-term effects.
Reducing the purchase price by $10,000 may lower the monthly mortgage payment somewhat.
But receiving $10,000 toward allowable closing costs could potentially reduce the amount of money you need at closing by thousands of dollars.
Or perhaps those funds could be used toward an allowable interest-rate buydown.
That doesn't mean seller concessions are always better.
It means:
Run the numbers before deciding what to negotiate.
What About Lender Credits?
Here's another option buyers should understand.
Sometimes you can select a slightly higher interest rate in exchange for a lender credit toward closing costs.
CFPB describes lender credits as rebates from the lender that offset some closing costs, typically in exchange for accepting a higher interest rate.
That creates another tradeoff:
Less money today vs. potentially more interest over time.
Neither choice is automatically right.
If cash is tight but the monthly payment still works comfortably, a lender credit might be worth considering.
If you're planning to own the home and keep the mortgage for a long time, perhaps paying more upfront for a lower rate makes more sense.
This is exactly why I like showing clients multiple options side by side.
Don't Compare Lenders Using Cash to Close Alone
This is a big one.
Suppose Lender A shows:
$17,000 closing costs
And Lender B shows:
$13,000 closing costs
It appears Lender B is $4,000 cheaper.
Maybe.
But what if one lender estimated homeowners insurance differently?
What if property taxes are estimated differently?
What if one quote includes discount points and another doesn't?
What if the interest rates aren't identical?
What if one estimate assumes different escrow reserves?
Those aren't apples-to-apples comparisons.
When I'm helping someone compare mortgage offers, I want to isolate the costs the lender actually controls and compare rate, lender costs and lender credits together.
Otherwise, a quote can look cheaper without actually being cheaper.
Don't Forget Your Earnest Money
Another common source of confusion is earnest money.
Suppose you put down $10,000 in earnest money after your offer was accepted.
That doesn't normally mean you pay another $10,000 at closing.
Assuming the transaction proceeds normally, that deposit is generally reflected as money you've already contributed toward the transaction.
Your Closing Disclosure ultimately calculates the actual amount you need to bring after accounting for deposits, credits and other adjustments.
So if you're budgeting for a purchase, make sure you understand:
Total cash needed
versus
Additional cash still needed at closing.
They're not necessarily the same number.
Dave's Take
After more than 26 years in mortgage lending, I've learned that buyers understandably focus on two numbers:
The interest rate and the down payment.
But there's a third number I want you to understand before making an offer:
Cash to close.
And I don't want to discover that number three days before closing.
Before you start seriously shopping, we should have a conversation about:
How much cash do you have?
How much do you actually want to use?
Those aren't always the same number.
Maybe you have $100,000 available.
That doesn't automatically mean putting all $100,000 into the transaction is the smartest move.
Perhaps keeping $20,000 or $30,000 in reserves gives you more financial security.
Maybe a smaller down payment makes sense.
Maybe we negotiate seller concessions.
Maybe a lender credit makes sense.
Maybe down payment assistance is available.
The goal isn't to get every dollar you have into the house.
The goal is to structure the purchase intelligently.
The Bottom Line
When you're buying a home, don't ask only:
“How much do I need for my down payment?”
Ask:
“What will my total cash to close be?”
Then go one step further:
“Is there a smarter way to structure it?”
Your down payment is only one part of the equation.
Closing costs, prepaids, escrow deposits, earnest money, seller concessions, lender credits and your financing strategy can all affect the final amount.
And that's exactly why I recommend figuring this out before you find the house.
If you're considering buying a home, I can help you model the numbers before you start shopping so you understand approximately how much cash you'll need—and what options may be available to reduce it.
About the Author
Dave Cook | Branch Manager & Loan Officer
Dave Cook is the founder of Denver Mortgage Lounge, a Division of Luminate Bank. For more than 26 years, he's helped individuals and families navigate mortgage financing and make smarter real estate decisions.
Dave's approach goes beyond getting a loan approved. He believes mortgage financing should support a client's broader financial goals and long-term wealth-building strategy.
Dave Cook
Branch Manager | Loan Officer
Denver Mortgage Lounge, a Division of Luminate Bank
201 Columbine Street, Suite 300
Denver, CO 80206
Phone: 303-226-8735
Email: dave@denvermortgagelounge.com
Website: denvermortgagelounge.com
Dave Cook NMLS #274175
Luminate Bank NMLS #1281698
Equal Housing Lender
This article is for educational purposes only and is not legal, tax or financial advice. Loan programs, guidelines, rates, fees and eligibility requirements are subject to change. All loans are subject to credit approval and program eligibility.
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