Can Closing Costs Be Rolled Into Mortgages? Find Out How It Works

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Introduction To Closing Costs

Closing costs are the loan fees and other costs you incur when you purchase or refinance a home. There’s no escaping them, but depending on the type of loan you use, you might be able to roll closing costs into your mortgage.

Can Closing Costs Be Rolled Into Mortgages?

Yes, rolling closing costs into your mortgage means you’re financing them along with your home loan. This can be helpful if you don’t want to put them upfront, but it does come with trade-offs.

The benefit is that you’ll need less cash or no cash at closing. The downside is that you’ll either need to borrow more, which raises your monthly payment and total interest, or accept a higher interest rate.

How To Roll Closing Costs Into Your Mortgage

How you go about rolling the costs into your loan depends on the lender and the type of loan. However, there are two primary ways — you can finance them or you can accept a lender credit.

How To Roll Closing Costs Into Your Purchase Loan

When it comes to rolling closing costs into a loan, purchase loans have an advantage refinance loans don’t — a seller who can make the process easier.

Financing Your Closing Costs

Some loan types, including those backed by the U.S. Department of Veterans Affairs and U.S. Department of Agriculture, allow borrowers to add at least some of their closing costs to their loan principal.

If you go this route, you’ll borrow the amount you need to pay for your home plus the amount you need for closing costs, up to certain limits that vary by loan type. In the case of a U.S.D.A.-backed loan, however, you can only borrow up to the appraised value of the home.

In some home sales, the financing is a seller concession. Here are some points to know:

• With a seller concession, you ask the seller to pay part or all of your closing costs.
• No money changes hands, however, and the seller typically won’t pay the closing costs out of pocket. Rather, they’ll give you permission to finance your closing costs.
• The closing costs then get paid from the seller’s sale proceeds, which reduces their net proceeds from the sale.
• In most cases, you’ll have to pay a higher sale price to make up for the concession.

Lender Credit

True to its name, a lender credit is money a mortgage lender credits to a borrower to pay closing costs. It’s not free money, however — the lender recoups the cost by charging the borrower a higher, “premium pricing” interest rate.

How To Roll Closing Costs into a Refinance Loan

No-closing-cost refinance loans work the same way as similar purchase loans. The lender does charge you for closing costs, but it does so by charging you a premium mortgage rate.

Alternatively, you can add some or all of your closing costs to the amount you borrow — assuming you have enough equity.

• Cash-out refinance: You borrow the amount you need to repay your current loan and take an additional amount in cash. You can have closing costs paid from that cash.
• Limited cash-out refinance: This loan lets you take a small amount of cash, such as $2,000 or 2% of the loan amount, depending on the loan. That could be a good option if you don’t need to cash out equity for a reason other than to pay closing costs. The cash might not cover all your closing costs, but it’ll offset them.
• No-cash-out refinance: If you don’t need cash from your mortgage refinance, you can add closing costs to a standard, no-cash-out refinance loan. The benefit is that standard refinance loans typically have lower rates.

Pros of Rolling Closing Costs Into Your Mortgage

Rolling closing costs into your mortgage loan has some clear benefits.

• If you’re unable to save the cash you need for a down payment and closing costs, rolling in closing costs can help you buy a home sooner.
• Lower out-of-pocket expenses leave you with extra cash to put toward home repairs or an emergency fund.

Cons of Rolling Closing Costs Into Your Mortgage

Beware of these downsides of rolling closing costs into your loan:

• You’ll need to stay within your approved loan amount, so rolling in closing costs usually leaves you with less to spend on the home.
• You’ll pay more interest over the life of the loan than if you’d paid the closing costs in cash.
• The extra principal and/or interest payments increase your debt-to-income ratio, which could make it difficult to get a car loan or other credit.
• A higher principal will increase your loan-to-value ratio. If it increases the LTV to more than 80%, you’ll have to pay mortgage insurance.

Pros and Cons of Rolling Closing Costs Into Mortgage: At a Glance

Alternatives To Rolling Closing Costs Into Your Mortgage

If you don’t want to add closing costs to your loan, there are other options:

• Ask the seller to help: Some sellers may cover part of your closing costs but they might expect a higher offer in return.
• Look for lender deals: Some lenders offer no-closing-cost loans but they usually come with a higher interest rate.
• Check for assistance programs: Some state and local programs offer grants or low-interest loans to help with closing costs.

How Rolling Closing Costs Affects Your Loan

Rolling closing costs into your mortgage doesn’t just mean adding a lump sum to your loan — it has an impact on your loan structure and long-term costs.

• Since closing costs typically range from 2% to 7% of your loan amount, rolling them in could add thousands to your total mortgage balance.
• The extra amount will accrue interest over the life of the loan as well.
• For example, if your closing costs are $5,000 and you roll them into a 30-year mortgage at 6% interest, you’ll pay close to $10,800 factoring interest over time.
• It’s important to weigh the immediate benefit of keeping cash in hand vs. the long-term cost of borrowing more.

Conclusion

Rolling in closing costs means higher payments and less house then if you paid them upfront. It could be worth it if it helps you buy sooner and escape high rent. But if it’s just for convenience, waiting and saving up funds for a while longer might be the better move.

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