What is Cash to Close? Closing Costs, Prepaids and Impound Accounts Explained
In addition to your down payment, you’ll need additional funds to cover “closing costs” and “prepaids” when purchasing a home. Your deposit plus closing costs and prepaids equals your cash to close.
Closing cost are items associated the real estate purchase and the mortgage and typically include:
• Loan related fees….Credit report, appraisal, any lender fees
• Escrow Fees (An impartial third party holds your deposit, and works with all parties to facilitate the transaction)
• Lender’s Title Insurance (Protects the lender’s interest in the property while you have the loan)
• Recording Fees (County fees to record title changes and loan documents)
• Notary/Signing Services
Prepaids are not really fees, they are items that are either prorations or that need to be paid in advance.
• Prepaid mortgage interest paid to the lender from the date of funding to the 1st of the month.
• Annual Homeowner’s insurance paid in full at closing
• Prorated property taxes
• Additional funds to set up an impound account
What is an Impound Account and do I Need One?
Government loans programs, such as FHA and VA, and conventional loans with less than a 20% down payment all require an impound account.
An impound account is a savings account that’s held by your lender and set up from funds that you deposit at closing for the specific purpose of paying your future property taxes and hazard insurance. It’s also known as an escrow account.
• 1/12 of the annual property tax and homeowner’s insurance premium is collected with your mortgage payment. When due, the lender will directly pay the county tax collector and your homeowner’s insurance company on your behalf.
• Depending on the month you close, to ensure there’s enough to pay the next property tax installment due, the funds required to set up this account may be higher based on the due date of the next property tax installment. Typically closing earlier in the year requires the least amount of funds deposited into the account.
For convenience, most borrowers do choose an impound account, even when not required. It’s easier and more convenient to just pay the same monthly amount, verses saving and paying large lump sums when property taxes and homeowner’s insurance payments are due.