What Are Cash Reserves and Why Do You Need Them?
What Are Cash Reserves and Why Do You Need Them?
When people talk about closing costs, it typically means the direct costs of getting a new mortgage. However, there are two primary types of closing costs, referred to as recurring and non-recurring charges. Recurring charges include things that will happen repeatedly as one owns the home. What might they be? Recurring charges are property insurance, interest, and property taxes. Those will come due every year.
Non-recurring closing costs are one-time fees. The fees you’ll see on your settlement statement. These ‘one-offs’ are property appraisal fees, lender charges, and other third-party services such as attorney fees. These are one-time charges associated with your closing your loan.
These fees are all added to arrive at a ‘cash to close’ amount. This of course means including your downpayment. When lenders ask for your bank or investment statements from the accounts you’re using to close your transaction, they make sure you have enough funds available that belong to you to pay everyone what they’re asking for. This also includes a ‘non-cash’ item you don’t have to shell out any money for but need to have them instead. These funds are referred to as ‘cash reserves.’ What are cash reserves?
Cash reserves are funds left over after the closing has taken place. This means some extra, liquid cash on hand available to you. Okay, so how much do cash reserves cost?
Cash reserves aren’t a charge, you’ll keep the money in your bank account but lenders still ask that you have them. How much? Reserves are typically grouped into a month or two of mortgage payments. These payments include the principal and interest charges and also a monthly amount for the annual property tax and homeowner’s insurance tab. If the principal and interest payment is $2,000 1/12th of the property tax bill is $200 and insurance is $100, then the total payment is $2,300. If a lender’s loan guidelines ask for two months of reserves you need $4,600 left over.
Why? Primarily because lenders don’t want you to go flat broke after a closing. Lenders know you can’t wait to start decorating your house with your new stuff so there needs to be some funds left. Again, cash reserves aren’t an out-of-pocket expense, but you do need to show that you have them.
Do you need more information or have other mortgage questions? We can refer a great local lender with extensive mortgage knowledge. Reach out to us with any real estate related questions at 540-537-9281
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