With this earnest money calculator, we aim to help you calculate the earnest money deposit you need to pay upfront to the seller to purchase a property. You can also use our rental property calculator and real estate commission calculator to understand more about this topic.
We have written this article to help you understand what earnest money is, how to calculate the earnest money deposit, and whether the earnest money is refundable. We will also demonstrate some calculation examples to help you understand the process used in the calculations.
What is earnest money? Earnest money meaning
The definition of earnest money is the amount of money that you need to pay to the property seller to show good faith in moving forward with the deal and completing the transaction.
The earnest money is usually about 1% to 3% of the property price. It can also rise up to 5%, and even 10%, if the property market is really hot, like what happened during the pandemic times.
After we clear up the earnest money meaning, we should move on to its calculation.
How the earnest money calculator work
Now that you know the earnest money definition let's look at the calculation process. Assuming Cindy is buying a property:
- Property type: Residential;
- Property price:
- Earnest money percentage:
Cindy can calculate the earnest money needed for her transaction in three steps:
Determine the property price
The first step is to determine the price of the property. This is normally listed by the property owner or seller, though it is possible to negotiate the price and reach a lower and more favorable amount for the buyer.
property priceof Cindy's transaction is
Determine the earnest money percentage
Next, you need to know the
earnest money percentage. This is normally decided by the property seller. The number usually fluctuates around 1% to 3% but can go as high as 5%, or even 10%, when the property market is really hot.
In the end, it is all down to the results of the negotiation between the property seller and the buyer. For Cindy, she is looking at an
earnest money percentageof
5%. You can use our percentage calculator to speed up this calculation.
Calculate the earnest money needed for the property transaction
The last step is to calculate the earnest money needed. You can do that using the formula below:
earnest money = property price × earnest money percentage
For our example, Cindy needs to pay
$1,000,000 x 5% = $50,000as
earnest moneyfor her property purchase.
If you need to make quick calculations, simply use the earnest money calculator!
Does earnest money go towards down payment?
Now that you understand what earnest money is, let's look at another vital question: Does earnest money go toward the down payment?
If eventually, you decide to go through with the deal, the earnest money deposit will count towards your down payment and the purchase price of the property.
Is earnest money refundable?
Usually, earnest money will not get refunded if you decide to back out from the property deal. It is only refundable if the property has some faults, such as structural damage.
How much is the earnest money for a property of $600,000?
The earnest money needed for the purchase is $12,000, assuming the earnest money percentage is 2%. You can calculate this by multiplying $600,000 by 2%.
What is a common earnest money percentage?
In general, the typical earnest money percentage lies within 1% to 3%. Although 2% is a common earnest money percentage, it goes up to 5% for some more expensive properties.
How do I calculate the earnest money needed?
You can calculate the earnest money needed in three steps:
- Determine the property price.
- Determine the earnest money percentage.
- Apply the earnest money formula:
earnest money = property price × earnest money percentage.