Closing Costs vs. Down Payments

Are closing costs and down payments the same thing? They may seem like it, but they’re not. That down payment on a home is not the same as the money you’ll need to pay for closing costs, though they both help you buy a home. When you’re shopping for a house, you may be focused more on gathering the money you’ll need for a down payment than you are worrying about coming up with the cash to cover closing costs. But both play a key role in a successful home purchase.

What’s the difference between closing costs and your down payment? Closing costs cover fees, taxes and administrative expenses required to process the purchase of your home while your down payment usually consists of two parts. The first part of the down payment is the earnest money, or the cash you put in escrow when you first make an “offer to purchase” on the home. The second part is the remainder of the down payment which you give the lender when you make the purchase at closing.

How Do Down Payments and Closing Costs Work Together? The down payment and closing costs have a few things in common. Do closing costs include down payment monies? Not usually. Typically, you as the homebuyer will need to produce the down payment cash from your own savings, though this is not a hard-and-fast rule. But they are separate entities, and each perform a different function when purchasing real estate.

The down payment. The money that makes up the down payment must be paid during the home buying process. Whatever money is paid out as either earnest money or a down payment is deducted from the purchase price of the home. And the amount that remains will typically get folded into your loan.

Keep in mind, depending on the type of loan you have, you may be required to pay private mortgage insurance (PMI) if you pay less than 20% down. When that’s the case, a PMI charge will be prorated into your closing costs. This is often the case with FHA loans which only require a down payment of 3.5% of the purchase price. You’ll also pay a monthly PMI fee until 20 percent of your loan is paid. This fee can add thousands to the cost of the loan in additional expenses.

The closing costs. These are an assortment of taxes and fees charged by governmental entities, local municipalities, and administrative groups handling your loan and processing your real estate purchase paperwork. They’re very different from the down payment. Closing costs will usually include fees and charges relative to the type of loan you have and the services required to process that specific loan. FHA loans and down payments allow most closing costs to be included in the loan which can be very helpful if you don’t have the cash required to close.

When Do You Pay the Closing Costs and the Down Payment? The closing costs are paid at closing, and the down payment is due at closing. Though both the down payment and closing costs can be paid via the same check.