According to real estate database Zillow, when financing a home, expect to pay approximately 3 percent to 5 percent of the purchase price as closing costs. By paying cash, you can greatly reduce these closing costs since you will normally have to pay only processing and recording related fees. Many of the settlement charges such as appraisal fees and inspection fees become optional for cash buyers. However, in the case of an all-cash purchase, you will still incur some closing costs.
Total Settlement Charges
The purpose of closing costs is to protect both the buyer and the seller, as well as pay individuals and businesses -- such as the title company -- that facilitate the transaction. You typically pay these charges at settlement when title to the property transfers to the buyer. Depending on your state, closing costs may typically involve more than 50 different items. The settlement statement is a closing document that itemizes all of these settlement fees. The basic charges you should expect to pay as a cash buyer include miscellaneous title fees, prorated property taxes, transfer fees, attorney fees and notary fees.
The majority of closing costs typically relate to a mortgage loan. When financing a real estate purchase, you commonly will have to pay various fees, including an application fee, appraisal fee, credit report fee, mortgage insurance and interest charges, mortgage origination fee, mortgage points and mortgage processing fees. A lender may also require you to prepay a few months property taxes and insurance to establish an escrow account. Additionally, you will still have to pay title charges and attorney fees. A lender will provide you with a list of all potential charges in the good-faith estimate prior to closing.
As a cash buyer, you will save on settlement charges, as many of these charges do not apply to cash purchases. Title search and title insurance are two items you will most likely still have to pay. The purpose of a title search is to verify that the property has no ownership interest issues, unpaid loans or potential liens. Title insurance protects you in case of an error associated with the title search. The cost of the title varies by title company, and the cost of the title insurance typically depends on the selling price of the property. Additionally, cash buyers will have to pay a fee to the local government for recording the transaction and possibly for the transfer of tile on the property.
Net Closing Costs
Sellers typically prefer cash buyers because cash transactions result in quicker closings with less potential for delays or problems. Cash buyers should also consider negotiating with the seller to pay for the closing costs associated with the transaction. Should the seller agree to pay the closing costs, you could effectively purchase a property for cash without incurring any closing costs as the buyer.
- "Real Estate Principles"; Charles Floyd and Marcus Allen; 2002
- "Principles of Real Estate Finance"; Charles Long; 2010
- Minnesota Title & Abstract Company: Closing Costs - Who Pays and How Much?
- Zillow: Real Estate Buyer's Closing Costs
- ClosingCorp. "ClosingCorp Reports Average Mortgage Closing Cost Data for 2019," Pages 1, 3, and 4. Accessed August 14, 2020.
- U.S. Congress. "12 USC Ch. 27: Real Estate Settlement Procedures." Accessed August 14, 2020.
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed August 14, 2020.
- U.S. Department of Housing and Urban Development. "Mortgage Insurance Premiums," Page 1. Accessed August 14, 2020.
Brian Bass has written about accountancy-related topics and accounting trends for "Account Today." He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master's degree in accounting from the University of Utah.