This post will highlight all the closing costs when paying all cash for a home. Paying all cash for a home has lower costs and fees. It is also a great way to get a better deal on a property.
With all cash, a buyer can make a no-financing contingency offer that is much more attractive to the seller. A financing contingency and an inspection contingency are the two main reasons why deals fall apart.
Paying cash for a property saves you money in terms of closing costs because you cut out fees associated with the lender. However, you've still got to pay various fees to protect your purchase. Therefore, don't think that just because you are paying all cash for a home that there are no closing costs.
Closing costs for the seller and the buyer is the main reason why people should hold onto their properties for as long as possible. If you are thinking of selling your property within five years of purchase, buying is not recommended.
Selling costs can easily eat up about 6% of the returns from your home due to the 5% real estate selling commission plus transfer taxes and other settlement fees that can amount to 1%.
Closing Costs When Paying Cash For A Home
If you plan to buy a property with cash, you must bake in the closing costs when making your offer. I have personally purchased two homes worth millions of dollars each in cash.
Below is an example of all the closing costs related to a cash purchase of a $1,750,000 home in California. Each state has slightly different fees, but the main costs are more or less the same.
The closing costs are listed under the Debit column.
After paying a 3% deposit for the home ($52,500 Credit) once the offer was accepted by the seller, it's time for the buyer to pony up the following fees.
Closing Costs By Line Item
As you can see from the sheet above, there are still closing costs despite paying an all-cash offer of $1,750,000. The total cost is about $5,515.46. In other words, closing costs equal about 0.3% of the cost of the home.
County Taxes: $322.46. This is the pro-rated amount of taxes the buyer must pay that the seller no longer has to pay.
Owner's Title Insurance (optional): $3347. Although owner's title insurance is optional, it is highly recommend all buyers get owner's title insurance to protect their purchase from any title defects, such as liens on the property or wrong names. The older the property, the more potential defects to the title. We'll go into detail on why owner's title insurance is important below.
Escrow Fee: $1,570. This fee is paid to the escrow company handling the transaction. The escrow company is usually picked by the seller because the seller initially pays a fee to analyze the title of the property before selling. For the buyer to insist on a different escrow company would be a waste of money since analyzing the initial title costs money (~$500).
Title Costs Are The Biggest Closing Costs When Paying All Cash For A Home
Title Notary: $15. The notary takes your signatures and thumbprints and makes sure all the documents are official.
Title Record Processing Fee: $25. Another fee the Escrow company charges to make sure the documents are filed and official.
Record Of Grant Deed To San Francisco County Assessor: $36. This is the cost to get the grant deed, the official document that says you are the owner of the property according to your city.
Total Cost To Buyer: $5,315.46. The buyer must send $5,315.56 plus the remaining purchase price balance after Credit of $1,697,500 = $1,702,815.46. The buyer closing cost of $5,315.56 equals 0.3% the cost of the home ($1,750,000), which is not bad.
If the buyer were to go with a lender, s/he would have to pay the lender title fee, mortgage origination fee, and more. The total buyer cost would be closer to $8,500 instead of $5,315.56.
Note: there is no inspection fee or real estate attorney fee because they are not mandatory in California or desired in this example. Further, these fees have nothing to do with what the buyer owes a seller, lender, or escrow company.
Why Title Insurance Is Important To Get
Out of the total buyer cost of $5,315.56, $3,347 is in the form of the Owner's Title Insurance (63% of cost). It is very tempting to not get Owner's Title Insurance for this purpose, especially since you are signing all these documents trusting the seller and the escrow company and the city did their jobs.
Unfortunately, Owner's Title Insurance is a necessary expense and an unavoidable closing cost when paying cash for a home.
Most lenders require a borrower to purchase a lender’s title insurance policy, which protects the amount they lend. But, a lender’s title insurance policy does not provide added protection to the borrower.
An owner’s title insurance policy will protect the home buyer’s financial investment in the home. In general, owner’s title insurance protects home owners from someone, at some point, contesting their ownership in the property.
Example Of Why Title Insurance Is Important
An example of a very common title issue is one that occurs during a refinance. Often times during a refinance, the new lender pays off the current lender’s loan with the proceeds from the refinance. When this happens, a Discharge of the paid off loan is to be recorded at the Registry of Deeds either by the new lender, the closing attorney or the borrower.
But what happens if a Discharge is never recorded? And what happens if there is another refinance a few years down the road and yet another Discharge is not recorded? A problem will arise when the home owner attempts to sell the property and a title search of the property is conducted.
The title examination will reveal that there are several outstanding mortgage liens on the property and the property will not be able to be conveyed to a buyer until this title defect is cleared.
Owner’s title insurance will not only protect the seller from this kind of loss but the title insurance company will also defend the seller and pay for the cost in clearing the title. A costlier title issue to clear would be one involving a discrepancy with land ownership.
If curious, here are all the mortgage fees in a no-cost refinance. Just know there are always fees when getting out a mortgage, even if the bank says no cost.
Other Examples Of Why Title Insurance Is Necessary
A seller has co-owned her property with her brother for 25 years. She and her brother have not spoken in the last ten years and she is unaware that she needs her brother’s signature on the deed to sell the property.
A buyer purchases the property and attempts to sell it someday. A title examination reveals the buyer did not purchase the property with good, clear, marketable title as the brother still has an ownership in the property.
Again, owner’s title insurance will not only protect the seller from this kind of loss but the title insurance company with also pay for the financial cost of litigating the claim of ownership to the property. The financial cost to a seller without owner’s title insurance could be hundreds of thousands of dollars.
Although you may never need it, the peace of mind and financial savings are monumental if you need it someday.
Notice The Earnest Money Deposit
In the above example, the buyer put down a $52,500 deposit, or 3% of the home's purchase price in order for the seller to accept the offer.
Although there are closing costs, the 3% deposit is by far the highest cost IF the deal does not go through and the seller decides to contest. The 3% deposit is always deposited to an escrow account at a title company. The title company's main responsibility is to ensure the transaction is completed properly and nobody gets screwed.
From the buyer's perspective, the 3% earnest money deposit should be considered your “at risk money.” Your financing and inspection contingencies should give you an out without having to sacrifice a dollar of your earnest money deposit. However, if you decide to back out last minute for a different reason, there is a chance the seller gets to keep your deposit.
From the seller's perspective, if you have a choice, you should absolutely only engage with borrowers who are at least preapproved if they do not have all cash.
Going through the preapproval process can often take 2-4 weeks. Therefore, not only will the seller know that a preapproved borrower has the financial means, the seller will also know the buyer has the intent.
Bake In Your Closing Costs When Paying All Cash
A savvy homebuyer or real estate investor will bake into their offer contract the closing costs. Do not be blindsided by closing costs when it finally comes time to sign the papers.
In the above $1,750,000 example, it would have been a mistake for the buyer to think that $1,750,000 was all s/he had to come up with. If that was the case, the buyer should have offered $1,744,684.54 if $1,750,000 was the maximum s/he wanted to pay.
Closing costs are somewhat negotiable if it is a buyer's market. In other words, you may be able to get your seller to pitch in to cover some of the costs. But this negotiation might also backfire and cause you to lose the property.
As a result, it's better to have a clean offer that bakes in closing costs in your transaction. That way, everybody feels better if the offer is accepted.
Take Advantage Of Low Mortgage Rates
Instead of paying all cash, maybe you want to take advantage of record-low interest rates like I am doing. If so, check online. You'll get qualified lenders competing for your business.
It's free and takes less than three minutes to get real quotes. Take advantage of all-time low mortgage rates and refinance today.
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Closing Costs When Paying All Cash For A Home Is A FS original post.
26 thoughts on “Closing Costs When Paying All Cash For A Home”
I am planning on purchasing my Brother’s home for $200,000 in Florida after selling my home. After selling mine, I could pay cash and buy it outright and be debt free but you suggest taking advantage of low interest rates. At some point within a year I planned on taking a home equity loan for to make some upgrades to the house. Would it be smarter to take out an initial mortgage for the house or wait and take on a home equity loan?
So what about refinancing mortgage APR% rate vs. principal% rate a bank gives then? If all closing costs, fees, etc. are what determines the APR% rate, why doesn’t everyone just pay the closing costs, fees, etc., up front, a cash payment, outside of the loan? Wouldn’t this mean you would actually just be paying the principal% rate then? We’re told to use the APR% to evaluate loan offers. But if it’s possible to take out a loan, and pay all extra fees, etc. myself (not roll those into the loan) then why can’t I just use the principal% rate to evaluate loans against each other? But I’m told you can’t do it this way. Is that really the case?
For example: I get a 10 year loan of $100,000 at 10%. I’m then told I have $5,000 in closing costs, fees, etc. so I’m thinking I actually have a $105,000 loan and my APR% is quoted as 15%. But I pay the $5,000 at the same time as the loan, but separately, outside of the $100,000 loan. Why do I then have to pay the APR% rate? Or do I? I want to save myself 5%. If I can’t pay the $5,000 up front, am I then actually paying 15% on just the $5,000 and then 10% on just the $100,000?
I did not see a cost for attorneys fees. Is that included elsewhere?
No fees in this example. Most people I know do not use an attorney to buy and sell real estate anymore since the contracts are standardized now, Docusign makes transacting easy, and most are deals are straightforward.
Did you use an attorney to buy or sell real estate? If so, please share what it cost.
Ha- that was a (nice) surprise for me when I moved to Oregon from New YOrk. In New York City atleast, you still need a lawyer for real estate transactions. Out here, it’s almost unheard of. I guess California is similar.
Dang, NYC really seems like it’s in trouble for real estate. Density of the population and the resulting COVID-19 infections and deaths, brokerage fee to rent an apartment (finally abolished), high taxes, and now needing a lawyer? Jeez.
It is not just NY.
There are title company states that you seem to be familiar with, and then there are attorney states.
NC is also an attorney state and every closing can only be done by an attorney, which is not a bad thing in my opinion
I’m sure there are several. Maybe I’ll do some research and put together a post about which states require an attorney to buy and sell property.
Curious on your thoughts… Even if you have the cash, with low interest rates today and tax benefits (less today than prior years), does it make most sense to pay all cash for a home?
Each personal situation is different of course, and I’m sure part of this relates to how much other debt you have as well.
Nice write up.
Sure. Depends on the situation. If you can get 5% off of a $2 million home by paying cash, that’s $100,000 in savings. Calculate that savings with the higher price of paying with a mortgage.
Depends on how good you can negotiate and what the seller is willing to give.
You can always do a HELOC or cash-out refinance.. in normal times.
Sam, I assume you are paying cash to find a distressed buyer wanting to close quickly and will then do a cash out refinancing like I did and extract the equity?
Or plan to be mortgage free going forward?
Not sure. I’m not a fan of cash out. It’s a fun goal for me to pay down debt and move onto the next asset once that debt is paid off. But if I were to buy a property now, I would need a mortgage, hence the preapproval. I don’t have enough cash to buy what I want.
I appreciate this article as I hope to pay all cash for my next house. I wasn’t aware of all these fees, so it was really informative to understand each of them in detail but easy to understand. In particular, the description on title insurance was quite informative
If you pay all cash and get a mortgage after the deal is done and closed, does the mortgage count as a refinance, or can you get the same rates as if you took out the mortgage at the time of purchase?
I second this question.
Rates are changing every day. Your mortgage rate depends on where rates are at the day of lock.
I guess I wasn’t specific enough in the question, I was wondering if you buy all cash, can you get the “purchase” mortgage rates after the fact, or does count technically as a refinance, where you would get the “refinance” mortgage rates, which are usually not as good as the former.
No. The rate is time dependent. It’s like saying you get to rewind time and buy the S&P 500 below 2,400 on March 23, 2020. Probably not gonna happen.
I bought all cash a few years ago (I live in the South, where houses are cheaper). I finally decided I should take on more risk since I am relatively young, so I looked into getting a mortgage on an existing fully owned house.
Here’s my experience:
I could easily get the mortgage at prevailing rates, there wasn’t any ‘refinancing’ penalty. However, closing costs were still about $3,000, whereas a Home Equity Line of Credit was only about $300. Plus with the HELOC, every few months my bank gives me the chance to pay a couple hundred dollars and lock in a promotional rate that is comparable to a 30y fixed mortgage. As long as I get similar rates and pay off the HELOC before about 10 years, it should be a win. Furthermore, as I pay it down the required monthly payment also goes down.
Best of all, I only draw on the HELOC as needed (I use it to fund an options trading account and can sell the put options against access to margin).
If the home is part of an HOA, it’s pretty likely there will be HOA fees above and beyond the regular dues (initiation, transfer, reserve contribution, etc.).
Don’t think the HOA fees are part of the closing costs between a seller, lender, and buyer. However, extra HOA fees for reserves by extra assessments can certainly come up.
HOA fees, specifically those I mentioned, have been a part of my last 3 home buying & selling transactions. 2 of those were cash transactions. It probably varies depending on the HOA. The homes I’ve owned where there was an HOA, the HOA utilized a management company (I’m not a fan but that’s a different conversation). For any home purchase or sale within those HOAs, the management company had to prepare paperwork, even if it was a cash deal, and I’d guess that was there justification for the initiation or transfer fees. The reserve contribution fee was, I suppose, something the HOA board had decided to charge new residents upfront. I don’t know if it would have been possible to pay that reserve contribution outside of the closing and exclude it from the closing costs … maybe. Cheers.
Gosh there sure are a lot of fees involved when buying real estate! Fees are a pain but it helps to see what each of them are for so it doesn’t just feel like throwing money away or being charged for nothing. Thanks for explaining them in detail. Also good insights on title insurance. I ever really understood what all that is for.
”Confirm that the liens are removed with the title company and the bank. You can do so by requesting a “Reconveyance Letter” from the mortgage holder. You must request it; the mortgage holder doesn’t send it automatically. It will confirm that there are no liens existing, and that the title has been “reconveyed” to you, the owner. This letter will save time and money when going through future credit/title searches, as it shows the lender/buyer owns it with no complications.”
FS, you discussed this in one of your previous excellent discussions, Mortgage Payoff Fees And Procedures To Know, where that passage is included.
Paying cash for a home is the fastest and least expensive way to do it. If you have the cash, I can highly recommend.
Great reminder! Thanks.
Timely article having just retired and most likely paying all cash for next house. Any way to leverage these fees if you are buying and selling (buying not contingent on selling).