Buying a home has one very obvious number attached to it: the purchase price.

But once you get into escrow, a second number suddenly becomes very important:

How much cash do I actually need to close?

If you’re financing your purchase, your down payment is only part of the equation. There are lender fees, escrow charges, insurance, prepaid taxes, appraisal costs, and a collection of smaller expenses that have a habit of appearing right when you thought you had the math figured out.

None of this should be scary. You just want to know about it before you’re staring at your final settlement statement.

So here’s a straightforward breakdown of where the money goes when you buy a home with a mortgage.

YOUR DOWN PAYMENT IS NOT YOUR CLOSING COST

Let’s use a simple example:

Purchase Price: $1,000,000
Down Payment: 20% — $200,000
Loan Amount: $800,000

A buyer might naturally think:

“Great. I need $200,000.”

Not quite.

The $200,000 is your down payment. You’ll also need money for the costs associated with obtaining the loan and completing the transaction.

As a very broad planning guideline, financed buyers are often told to budget somewhere around 2%–3% of the purchase price for closing costs and prepaid expenses, although the actual amount can vary substantially depending on the loan, lender, property, insurance, taxes, escrow arrangements, and negotiated seller credits.

And importantly, not everything in that number is actually a “fee.”

Some of it is money you’re simply paying now instead of later.

Let’s break it down.

1. LENDER FEES

First, you have the cost of actually obtaining the mortgage.

Depending on the lender and loan program, you may see charges for things like:

• Loan origination
• Underwriting
• Processing
• Credit reports
• Tax services
• Flood certification
• Other lender-related administrative costs

This is why I always encourage buyers to compare more than just the interest rate.

Imagine:

Lender A: 6.25% rate with very low fees
Lender B: 6.125% rate with thousands more in upfront costs

The lower rate may still be the better deal.

Or it may take years before the monthly savings make up for the additional money you spent upfront.

The headline rate gets the attention.

The total loan cost tells the better story.

2. DISCOUNT POINTS

This is one of the bigger potential closing costs.

A lender may allow you to pay additional money upfront to obtain a lower interest rate. This is commonly referred to as buying down the rate or paying discount points.

Generally:

1 point = 1% of the loan amount.

So on an $800,000 loan:

1 point = $8,000.

Does that mean paying points is a bad idea?

Not at all.

But you should know your break-even point.

Let’s say paying $8,000 upfront reduces your mortgage payment by $200 per month.

$8,000 ÷ $200 = 40 months

In that simplified example, you’d need to keep that mortgage for roughly 3 years and 4 months before the monthly savings recover the upfront cost.

If you sell or refinance before then, the math may not work in your favor.

This is also approximately the point in escrow when a perfectly normal homebuyer begins voluntarily using spreadsheets.

3. THE APPRAISAL

Because the lender is putting up a significant portion of the purchase price, it typically wants an independent opinion of the property’s value.

Enter the appraiser.

The appraisal helps the lender determine whether the property provides adequate collateral for the loan.

For many properties, this will cost several hundred dollars, although larger, unusual, luxury, or more complicated properties can cost more.

An appraisal is different from a home inspection.

The appraiser is primarily evaluating the property for the lender.

The home inspector is evaluating the condition of the property for you.

You generally want both doing their respective jobs.

4. ESCROW FEES

Escrow is the neutral third party that helps coordinate the transfer of money and ownership.

They handle documents, receive funds, work with the lender and title company, prepare settlement figures, and eventually help get the deed recorded.

In other words, they’re the people keeping your million-dollar transaction from being conducted by Venmo and a handshake.

Escrow fees vary depending on the company, purchase price, location, and structure of the transaction.

In Southern California, customs regarding which party pays certain escrow and title expenses can also vary by area, and the purchase contract itself ultimately controls.

5. TITLE INSURANCE

Title insurance protects against certain problems involving ownership and title to the property.

In a financed purchase, there are generally two different title policies involved:

Owner’s Title Policy

This protects your ownership interest in the property.

Lender’s Title Policy

This protects the lender’s interest.

Who pays for particular title-related costs depends on the transaction, local custom, and what we’ve negotiated in the contract.

Unlike homeowners insurance, title insurance is generally paid as a one-time premium at closing.

6. HOMEOWNERS INSURANCE

If you’re borrowing money to purchase a home, your lender is going to require insurance.

And in California, this is something I recommend investigating very early in the transaction.

Insurance pricing can vary tremendously depending on:

• Location
• Wildfire exposure
• Age of the home
• Roof
• Electrical systems
• Prior claims
• Coverage level
• Insurer availability

You may need to pay the first year’s premium upfront.

If your mortgage includes an impound account, the lender may also collect additional insurance funds at closing to establish the account.

Which brings us to one of the most misunderstood portions of closing costs.

7. YOUR IMPOUND ACCOUNT

Some mortgage payments include more than principal and interest.

The lender may also collect money every month for:

Property taxes + homeowners insurance

That money goes into an impound—or escrow—account, and the lender pays those bills when they come due.

When the loan is first established, however, the lender may need to collect several months of taxes and insurance upfront to make sure enough money is sitting in that account.

This can add a surprisingly large number to your “cash to close.”

But here’s the important distinction:

This isn’t necessarily money you’re losing.

It’s money being reserved for bills you would have had to pay anyway.

When I’m reviewing closing figures, I like to separate everything into two categories:

Actual transaction expenses

and

Prepaid future expenses

It makes the closing statement considerably less intimidating.

8. PREPAID INTEREST

Your mortgage interest begins accruing when the loan funds.

But your first normal mortgage payment doesn’t necessarily happen immediately.

As a result, the lender generally collects interest covering the period between closing and the beginning of your regular payment cycle.

The exact amount depends partly on what day of the month you close.

So yes, even the calendar has found a way to participate in your real estate transaction.

9. PROPERTY TAXES AND PRORATIONS

Property taxes can look confusing on the closing statement because the seller may have already paid taxes that cover part of the period when you’ll own the house—or vice versa.

Escrow calculates a proration so that each party is responsible for the appropriate portion.

Then there’s another California favorite:

The supplemental property tax bill.

When you purchase a property, the county generally reassesses it based on the new ownership and purchase value.

If the previous owner had a much lower assessed value, you’ll likely receive a supplemental tax bill covering the difference.

And that bill can arrive after you’ve already closed.

Don’t mistake “escrow is closed” for “the county has lost interest in me.”

They have not.

10. INSPECTIONS

Inspections aren’t always technically part of your closing statement because they’re often paid directly during escrow.

But they’re absolutely part of the amount of money you should budget when buying a home.

Depending on the property, we may recommend some combination of:

• General home inspection
• Sewer inspection
• Roof inspection
• HVAC inspection
• Chimney inspection
• Pool inspection
• Foundation inspection
• Mold testing
• Geological inspection
• Other specialty inspections

You don’t need every imaginable specialist for every house.

But if there is a legitimate concern, I’d much rather you spend a few hundred dollars investigating it before buying the property than discover a $30,000 surprise after you move in.

Surprises belong inside birthday presents.

Not sewer laterals.

SO HOW MUCH MONEY SHOULD YOU ACTUALLY HAVE?

If you’re putting $200,000 down on a $1,000,000 property, I don’t want you thinking:

“I have $200,000. I’m ready.”

I’d rather you think:

Down payment
+ lender and escrow costs
+ prepaid taxes and insurance
+ inspections
+ moving expenses
+ a healthy post-closing reserve

The exact number will depend on your particular financing and property.

Before we write an offer, your lender can usually give us a much more precise estimate based on the purchase price we’re considering.

AND WHAT IF YOU’RE PAYING CASH?

Cash buyers get to skip a substantial chunk of this list.

With no mortgage, there’s generally no:

• Loan origination
• Underwriting
• Discount points
• Mortgage-related appraisal requirement
• Prepaid mortgage interest
• Lender impound account
• Lender’s title insurance requirement

But cash does not mean zero closing costs.

A cash buyer will still generally encounter costs involving escrow, title insurance, recording, property tax prorations, inspections, and homeowners insurance.

So cash purchases are usually simpler and less expensive to close—but the closing statement isn’t going to consist entirely of:

House: $1,000,000
Everything else: $0

Nice try.

ONE OF MY FAVORITE NEGOTIATING TOOLS: CLOSING COST CREDITS

Here’s where this gets particularly useful.

Suppose you’re negotiating on a house and the seller is willing to give you another $10,000.

We could potentially negotiate:

A $10,000 price reduction

or

A $10,000 seller credit toward allowable closing costs

For a financed buyer, those two options can have very different effects.

A $10,000 reduction in the purchase price may only change your monthly mortgage payment modestly.

A $10,000 closing-cost credit could potentially mean $10,000 less cash coming out of your bank account at closing.

There are lender limits and rules governing how credits can be used, so we have to structure them correctly.

But this is why I don’t look at negotiations as simply:

“How much can we get off the price?”

Sometimes the smarter question is:

“How can we structure this deal so you keep the most money in your pocket?”

If you’re considering buying a home, send me the approximate price range you’re looking at and how much you’re thinking about putting down.

I’ll help you understand the numbers before you find the house you want—because it’s much more enjoyable to fall in love with a kitchen when you already know you can comfortably afford the closing statement.