Estimate Your Cost to Close

TLDR: In addition to the down payment, prepare to pay about 5% of the purchase price in closing costs. A summary of all costs will be provided in the Closing Disclosure.

When people talk about the "down payment," they're often talking about how much money they'll have to pay at closing, which includes their closing costs. However, they're not the same.

What is the difference between a down payment and closing costs?

Down Payment

A down payment is a percentage of the sales price that you pay toward the house at closing.
The amount you put down is dictated by the lender and type of loan and can be as little as 3.5%, or as much as you feel comfortable putting down.
The down payment will convert into equity after you close on the house.
The lender will pay the difference between the sales price and your down payment.
The monthly mortgage payment will be determined by the size of the loan, not the sales price.

Closing Costs

Closing costs are transactional costs required to conduct the sale and include a variety of fees, such as recording fees for your local land records department, title search and insurance fees, transfer taxes, prepaid taxes and insurance, and other transaction costs.
Some costs are fixed, and others will fluctuate with the price of the house.
Transfer taxes, for example, are typically a percentage of the sales price, but title fees are fixed.
These fees can add up to significant amounts, so be sure to estimate to the best of your ability when calculating how much to save up before getting to closing.

Fun Fact

If you get to settlement, your earnest money deposit (EMD) will go toward the closing costs, which will reduce the amount of cash you'll owe at closing.

Examples of Closing Costs

Here's an incomplete list of typical closing costs you'll encounter:

Loan points and origination fees: Amounts vary widely; Check with your lender
Prepaid Insurance: The lender usually requires prepayment for six months at closing
Prepaid Taxes: The lender usually requires prepayment for six months at closing
Prepaid Interest: This is the interest that will accrue until the first mortgage payment and will usually be a couple hundred dollars depending on the interest rate and size of the property
Prepaid PMI
Title Search fees and Title Insurance: Ranges from a few hundred dollars to thousands depending on what coverage you select
Deed and mortgage recordation fees: These are small-ish flat fees, ranging from $40-50 apiece
Transfer taxes: These are usually a percentage of the purchase price and determined by the local municipality

Tip: Ask for Closing Cost Assistance

Closing costs can add up to a significant amount, sometimes as high as 5% of the purchase price! To lower the barrier to entry, buyers and sellers have begun negotiating a seller subsidy, sometimes referred to as closing cost assistance, which reduces the amount of cash that buyers have to pay at closing.

When you make your offer (and if the market isn’t too competitive), it’s prudent to begin negotiations by asking for seller assistance, also known as seller subsidy, seller assistance, and closing cost assistance. Why would the seller give assistance? Whether the seller lowers the purchase price or offers you a seller subsidy of the same difference, both actions end up netting the seller the same amount while making it easier for you to afford the purchase. If the seller wants to sell, they'll typically be willing to negotiate.

Beware: The Caveats of Seller Subsidy

The seller subsidy may only be applied to closing costs, not to the down payment.

If you increase your offer on the house to account for increased seller subsidy, the house must appraise for the increased purchase price–your lender won’t cover any dollar amount above the appraisal.

For example, if you offer $230,000 on a house and request $20,000 in seller subsidy to help cover your closing costs, effectively netting the seller $210,000, it's the same as offering the seller $210,000 outright.

However, if similar properties are selling for $215,000, the house may not appraise for $230,000, so you’ll be in a pickle with the lender.

The Closing Disclosure

Before closing, the lender or settlement company will provide you with a Closing Disclosure, a document that outlines all costs incurred in the transaction. For a comprehensive list of closing costs and definitions, check out this thorough Closing Disclosure Explainer from the Consumer Financial Protection Bureau.

Fun Fact

After you close on a house, you'll skip your next mortgage payment because mortgage payments are paid in arrears. If you time it right, you could have almost two full months of no mortgage payments! For example, if you close at the beginning of March, you'll skip April's payment and your first payment will be May 1st, so you'll get almost two full months without a mortgage payment. If you close on the last day of the month, however, you'll skip the mortgage payment due the next day, and you'll owe the mortgage payment the following month.

Example of Seller Subsidy

If a house has been listed on the market for $225,000 for a few weeks, you may decide to make an offer for $215,000 and ask for $5,000 in closing assistance. That would net the seller $210,000. To the seller, that would be no different than offering $210,000 with no closing assistance–the seller would still net $210,000. Similarly, if you were to offer the seller $220,000 and ask for $10,000 in closing assistance, the seller would net $210,000. When looking at offers, sellers are going to be most concerned about what they net.