Buying a home is a big step, but it comes with costs beyond the purchase price. One major expense is closing costs—fees you pay when finalizing your mortgage. Many homebuyers ask if they can roll these costs into their mortgage to avoid paying them upfront. This article explains whether that’s possible, how it works, and what you should consider to make the best choice for your finances.
What Are Closing Costs?
Closing costs are the fees and charges required to complete your mortgage. They typically range from 2% to 5% of the home’s purchase price. For example, if you’re buying a $300,000 home, closing costs could be between $6,000 and $15,000. These fees cover various services and expenses, including:
- Loan origination fees
- Appraisal fees
- Title insurance
- Attorney fees
- Prepaid property taxes and homeowners insurance
- Credit report fees
You usually pay these costs at the closing table, but there are ways to finance them instead of paying out of pocket.
Can You Roll Closing Costs Into Your Mortgage?
In many cases, you can roll closing costs into your mortgage. This means you add the costs to your loan amount and pay them over the life of the loan instead of upfront. However, this option depends on several factors:
- Loan Type: Different loans, like conventional, FHA, VA, or USDA, have specific rules about financing closing costs.
- Lender Policies: Not all lenders allow this, so you need to check with yours.
- Financial Situation: Your debt-to-income ratio and loan-to-value ratio may affect whether you qualify to roll in costs.
Because of these variables, it’s important to discuss this option with your lender early in the process.
How It Works for Different Loan Types
Each loan type has its own rules for rolling closing costs into the mortgage. Here’s a breakdown:
| Loan Type | Can Closing Costs Be Rolled In? | Details |
|---|---|---|
| Conventional | Varies by lender | Some lenders allow it, but others don’t. Check with your lender to confirm. |
| FHA | Partially | You can roll the upfront mortgage insurance premium (1.75% of the loan) into the loan. Other costs may need to be paid separately or through other means. |
| VA | Partially | The VA funding fee can be rolled into the loan. Other closing costs may require different arrangements. |
| USDA | Yes, with limits | Certain closing costs can be financed, but restrictions apply based on the loan-to-value ratio. |
Always ask your lender about the specific costs that can be included for your loan type.
Which Closing Costs Can Be Rolled Into the Mortgage?
Not all closing costs can be financed, and it depends on the lender and loan program. Generally, the following costs can often be rolled into the mortgage:
- Loan origination fees
- Discount points
- Appraisal fees
- Title insurance
- Credit report fees
However, costs like prepaid property taxes, homeowners insurance, and HOA dues usually need to be paid upfront. For government-backed loans, specific fees can be financed:
- FHA Loans: The upfront mortgage insurance premium.
- VA Loans: The VA funding fee.
Check with your lender to understand which costs you can finance and which you can’t.
Pros and Cons of Rolling Closing Costs Into Your Mortgage
Rolling closing costs into your mortgage has benefits and drawbacks. Here’s a look at both sides:
Pros
- Saves cash upfront: You don’t need to pay thousands at closing, which is helpful if you’re low on funds.
- Keeps savings intact: You can use your savings for other needs, like moving costs or home repairs.
- Possible tax benefits: Interest on rolled-in closing costs may be tax-deductible in some cases. Consult a tax professional to confirm.
Cons
- Increases loan amount: Adding closing costs to your mortgage means you borrow more, leading to higher interest payments over time.
- Raises monthly payments: A larger loan means higher monthly mortgage payments.
- May affect loan approval: A higher loan amount could increase your debt-to-income ratio, potentially making it harder to qualify for the loan.
Example Scenario: How It Impacts Your Loan
To understand the impact, consider this example. You’re buying a $300,000 home with a 20% down payment ($60,000), so your loan amount is $240,000. Your closing costs are 3% of the purchase price, or $9,000.
If you roll the $9,000 into the mortgage, your loan amount becomes $249,000. With a 30-year fixed-rate mortgage at 4% interest:
- Without closing costs rolled in: Monthly payment is about $1,146.
- With closing costs rolled in: Monthly payment is about $1,188.
The difference is $42 per month. Over 30 years, you’d pay an extra $15,120 in total payments. Of this, $9,000 is the closing costs (principal), and $6,120 is additional interest.
This shows that rolling in closing costs saves you $9,000 upfront but costs an extra $6,120 over the loan’s life. Decide if this trade-off fits your financial goals.
Alternatives to Rolling Closing Costs Into Your Mortgage
If rolling closing costs into your mortgage isn’t ideal, consider these options to reduce or cover the costs:
- Seller Concessions: Ask the seller to pay some or all of your closing costs. This is more common in markets where buyers have more negotiating power. For example, you might offer $309,000 for a $300,000 home, with the seller covering $9,000 in closing costs. Limits apply based on loan type:
- Conventional Loans: Up to 3% of the purchase price if your down payment is less than 10%, 6% for 10-25%, and 9% for over 25% (Rocket Mortgage).
- FHA Loans: Up to 6%.
- VA Loans: Sellers can pay all closing costs.
- USDA Loans: Up to 6% of the loan amount.
- Lender Credits: Some lenders cover closing costs in exchange for a higher interest rate. This is sometimes called a “no-closing-cost mortgage,” but you’ll pay more interest over time.
- Down Payment Assistance Programs: Many states and local governments offer grants or loans to help first-time homebuyers with closing costs. Check with your lender or a housing counselor for programs in your area.
- Gift Funds: Some loan programs allow you to use gift money from family or friends to pay closing costs. Confirm with your lender if this is allowed.
- Save and Budget: Plan ahead to save enough for both the down payment and closing costs. Shopping around for lenders can also help you find lower fees.
Tips to Reduce Closing Costs
Here are some practical ways to lower your closing costs:
- Compare loan estimates from multiple lenders to find the lowest fees.
- Negotiate with the seller for concessions, especially in a buyer’s market.
- Ask about first-time homebuyer programs that offer closing cost assistance.
- Review your loan estimate carefully to ensure all fees are necessary.
How to Decide If Rolling Closing Costs Into Your Mortgage Is Right for You
Choosing whether to roll closing costs into your mortgage depends on your situation. Consider these factors:
- Cash on hand: If you’re short on funds, rolling in costs might be the only way to close the deal.
- Long-term costs: Use a mortgage calculator to see how much extra interest you’ll pay by increasing the loan amount.
- Monthly budget: Ensure the higher monthly payments fit within your budget.
- Other options: Compare rolling in costs to alternatives like seller concessions or assistance programs.
Discuss your options with your lender or a financial advisor to make a decision that aligns with your goals.
What to Do Next
If you’re thinking about rolling closing costs into your mortgage, take these steps:
- Contact your lender: Ask if they allow financing of closing costs and what the requirements are.
- Request a loan estimate: Review the estimated closing costs to understand the total amount.
- Calculate the impact: Use a mortgage calculator to see how rolling in costs affects your payments and interest.
- Explore other options: Check if seller concessions, lender credits, or assistance programs are available.
- Make a choice: Weigh the pros and cons to decide what’s best for your financial situation.
By understanding the process and exploring all options, you can handle closing costs in a way that works for you.
Frequently Asked Questions
Do all lenders allow rolling closing costs into the mortgage?
No, not all lenders offer this option. Policies vary, so ask your lender if they allow it and under what conditions.
How does rolling closing costs affect my loan?
It increases your loan amount, which raises your monthly payments and the total interest you pay over the loan’s life.
Is rolling closing costs a good idea?
It can help if you’re short on cash, but it costs more in the long run due to extra interest. Compare it to other options to decide.
Can I roll closing costs into a refinance?
Yes, many lenders allow this for refinancing, but the same pros and cons apply. Check with your lender for details.
Conclusion
Rolling closing costs into your mortgage can make buying a home more affordable upfront, but it increases your loan amount and long-term costs. By understanding how it works for different loan types, weighing the pros and cons, and exploring alternatives like seller concessions, you can make an informed decision. Talk to your lender, review your loan estimate, and consider your financial goals to choose the best path forward.