Down Payment Vs Closing Costs, What’s The Difference?

Down Payment Vs Closing Costs, What’s The Difference?

When meeting with clients, one thing they almost always ask about is the Down Payment. They almost never ask about Closing Costs. I honestly don't think most people think about or are even aware of closing costs, especially first time home buyers.

So what is the Difference between the Down Payment and the Closing Costs? the short answer is that the Down Payment is your contribution towards the purchase price of the home. The Closing Costs are the fees, and expenses incurred in the process of buying or refinancing a home.

The Down Payment is a percent of the home's purchase price. The size or amount of the down payment can vary depending on the specific loan program you are using and your desired contribution. All loan programs have minimum required Down Payments. These typically range from 0 - 5%. You always have the option to bring in a larger down payment if you desire and can afford to do so. As an example, let's say that you would like to buy a home with a purchase price of $300,000.00 and your down payment is 5% or $15,000.00. You would then have a loan amount of $285,000.00. If you decided to bring in 10% or $30,000.00 for the down payment, then your loan amount would be $270,000.00.

Honestly, I could write an entire blog post just on down payments, but this should do the trick in explaining what a down payment is. OK, now on to Closing Costs, what are they?

Closing Costs are the fees, costs, and expenses that are charged or incurred to buy a home and/or get a home loan. Even if you bought a home with all cash or no loan at all, you would still have some closing costs. The person selling the home also has closing costs, so it's not just the home buyer that has to pay them. There can be a lot of people and services involved in buying a home or getting a home loan, and they all need to be paid for their services.

Some examples of Closing Costs are - loan origination points, and underwriting fees, Appraisal fees, Credit reporting fees, Title company fees, Government recording fees. There may also be a Set up fee for the Home Owner's Association of the neighborhood you are buying in. Much of the Closing Costs are what we call Pre-paids that are to fund your escrow account. These include Property taxes and Hazard insurance payments that are Pre-paid so that the money is available in your escrow account to pay for property taxes and insurance when those bills are due.

Again, as with Down Payments, I could write a whole blog post on Closing Costs. This article is not intended to be an in depth explanation of either topic, but this should suffice to explain the difference between Closing Costs and the Down Payment.

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