can you roll closing costs into a mortgage loan

Rolling Closing Costs into Your Mortgage Loan – The Pros and Cons

If you’re in the process of buying a home or refinancing your mortgage, you’ll soon be facing the closing costs – all those fees charged by lenders, appraisers, title companies, and more. Closing costs often run 3-5% of the total loan amount. So on a $300,000 mortgage, you could be looking at $9,000-$15,000 in fees at closing.

Many homebuyers don’t have enough cash savings to cover closing costs upfront That’s where rolling the costs into your mortgage comes in This option allows you to finance closing costs so you don’t pay anything out of pocket at closing,

While rolling fees into your loan can provide short-term financial relief, it does impact your long-term costs. In this article, I’ll explain exactly how closing cost rollovers work, the pros and cons, and whether it’s the right choice for your mortgage loan.

How Does Rolling Closing Costs into a Mortgage Work?

With a closing cost rollover, the lender pays your closing fees upfront and then adds the amount onto your mortgage principal. So if closing costs are $10000, your loan amount goes up by $10,000 to cover those charges.

You’ll repay the closing costs, plus interest, over the full term of the mortgage through higher monthly payments. The interest rate stays the same whether you pay costs upfront or roll them over.

Lenders allow you to finance up to 100% of closing costs in most cases. However, you likely won’t want to roll over 100% as we’ll discuss in the drawbacks section.

Key Things to Know About Closing Cost Rollovers

• Your loan amount increases by the amount of rolled over fees. This leads to higher monthly payments.

• You’ll pay interest on the closing costs for the life of the loan. With a 30-year mortgage, a $5,000 rollover would cost over $10,000 in interest.

• Most lenders let you roll over up to 5% of the total loan amount.

• FHA loans limit rolled fees to 1% of the mortgage. VA loans don’t allow cost rollovers.

• Ask your lender if there is a fee cap. Some lenders won’t finance over $5,000 or $10,000 in closing costs.

• Prepayment penalties don’t apply to rolled closing costs. You can refinance or sell without penalty.

Now let’s dive into the potential pros and cons of rolling fees into your mortgage loan.

The Potential Benefits of Closing Cost Rollovers

1. Less cash needed at closing. For borrowers without much savings, rolling fees over can make homebuying or refinancing more affordable. You may also be able to put more money down on the home purchase if you don’t have to cover closing costs out of pocket.

2. Reach your “break-even” point faster. With no upfront costs, you’ll hit the point where the amount paid on the mortgage principal equals the loan amount sooner.

3. Build home equity faster. Paying less cash up front means more of your monthly payments go toward the loan balance rather than interest. This builds equity faster.

4. Finance 100% of home purchase costs. First-time buyers can pay nothing out of pocket by rolling closing costs into a 100% financing mortgage.

5. Lower interest costs long-term (with a refi). If you plan to refinance within 1-3 years, rolling costs into a loan can mean less interest paid than closing costs on multiple loans.

The Potential Drawbacks of Closing Cost Rollovers

1. Higher monthly payments. With a larger loan balance, your mortgage payments will be higher over the full repayment term.

2. More interest paid over loan term. You’ll wind up paying interest on the closing costs for the full mortgage term, increasing total interest costs substantially.

3. Loan balance exceeds home value. If you roll over 100% of costs on a 97% loan, your balance may surpass the home’s fair market value.

4. Harder time qualifying for future loans. Lenders look at your total debt picture, and a higher mortgage balance can impact borrowing ability later.

5. Prepayment penalties with some lenders. While not common, some lenders charge early repayment fees on rolled closing costs if you refinance or sell the home within a set timeframe.

How Much Should You Roll Over?

As a general guideline, it’s smart to limit rolled closing costs to 1-2% of the total mortgage amount. This keeps your loan balance reasonable while still easing upfront costs. Our earlier $300,000 loan example would mean rolling $3,000-$6,000 in fees.

Run the numbers to see payment impacts and interest costs at different rollover amounts. Avoid exceeding 5% if possible. And definitely don’t roll over 100% of closing costs unless you have no other options and plan to move soon.

You can use rolled fees strategically to cover specific high-dollar closing charges like origination fees, appraisal fees, or points paid to buy down your rate. Ask your lender for an itemized fee estimate.

Should You Roll Closing Costs into Your Mortgage?

Here are some scenarios where rolling over fees can make good financial sense:

• You need to lower upfront costs on a home purchase and don’t plan to stay long-term
• You have minimal cash savings and limited alternatives to cover closing costs
• You’re refinancing and will break even on costs within 1-2 years
• You can roll just 1-2% of the loan amount to ease burden while minimizing interest

And here are cases when paying closing costs upfront is likely the better move:

• You can afford closing costs with your savings or other assets
• You plan to keep the home and mortgage for many years
• You want to build home equity more quickly and avoid “being underwater”
• You’re concerned about higher monthly payments down the road

I suggest running the numbers both ways – with fees rolled or paid upfront. Look at payment differences, total interest costs, breakeven points, and cash needed at closing. This will point you towards the smarter route for your unique situation.

Weigh the closing cost rollover pros and cons carefully as you make this mortgage decision. And work with lenders who are transparent about options to finance fees if desired. They should provide clear explanations so you understand the impacts over time. With the right information, you can determine if rolling closing costs into your loan is the way to go.