Down Payments & Closing Costs…Are they the same?

This is a question I get more frequently than not from First Time Home Buyers and those who simply have not been in the market for a while to buy a home: Are the Down Payment and the Closing Costs the same thing? 

...They are not

Simply put, the Down Payment is a percentage of the total purchase price that is put down as an upfront payment. It reduces the amount of money that needs to be financed for a home and is the “cash” portion of a purchase price that you use to buy a home. For example, a Home Buyer putting 5% down on a $100,000 property, would need to have $5,000 saved in reserves for the down payment while their lender would finance the other $95,000 for them. 

The $5,000 above does NOT include “Closing Costs”. These are the Lender’s fees (for processing the loan) and the Title company’s fees (for researching the Title to make sure everything in clear for a smooth transfer from Seller to Buyer). Simply put, Closing Costs are expenses “Over and Above” the purchase price of the property. 

A Down Payment is very clear on the % of monies that will be needed (given the loan option(s) available), but Closing Costs can change given variables of purchase price, location, etc. As a rule of thumb, if you know price-wise what range you are willing to pay for a home, I recommend clients have at least 2 - 3% of the purchase price in cash reserves for Closing Costs (on top of the Down Payment reserves already in place). That way if any surprises come up, there should be enough funds to cover them. 

Hope this breakdown of Down Payments & Closing Costs was helpful! Comment below with any questions.