In a Nutshell Mortgage closing costs can cost you thousands of dollars upfront. Some lenders will let you roll closing costs into your home loan, but that’ll likely increase your loan amount and your interest rate. Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect
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Closing costs are the fees and charges you pay when you close on a home purchase. These costs are in addition to your down payment and can range from 2-6% of the total mortgage amount. For many homebuyers, coming up with this extra chunk of change can be a challenge. If you’re wondering if you can take out a loan to cover closing costs, here’s what you need to know.
What Are Closing Costs?
Closing costs cover all the fees and prepaid expenses associated with finalizing a home purchase. These costs can include:
- Origination fees charged by the lender to process the loan
- Appraisal and credit report fees
- Title search and insurance fees
- Government recording charges
- Prepaid homeowners insurance premiums, property taxes, and interest
- Real estate transfer taxes
- Legal fees
On a $300,000 home purchase with a 5% down payment, closing costs could range from $6,000-$18,000. Coming up with this amount in cash can put a strain on budgets. If you don’t have enough cash saved, taking out a separate loan to cover closing costs may seem tempting.
Can You Use A Personal Loan For Closing Costs?
You can take out a personal loan to pay for closing costs Personal loans provide lump sum cash that can be used for almost any purpose If you have good credit, you may be able to qualify for a personal loan with a lower interest rate than a credit card.
However, there are some potential drawbacks to using a personal loan for closing costs:
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It increases your total debt load – You’ll have another monthly loan payment to fit into your budget on top of your mortgage payment, This raises your debt-to-income ratio which could impact your ability to qualify for the mortgage
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May raise red flags for lenders – Bringing large new debts to closing could cause your lender to re-evaluate approving your mortgage. Get pre-approval before taking out a personal loan.
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Higher interest rates – Personal loans typically have higher rates than mortgages. You’ll pay more in interest over time versus rolling costs into the mortgage.
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Paying interest on interest – By rolling closing costs into your mortgage, you’re essentially paying interest on those fees over the life of the loan. It’s usually better to pay cash upfront if possible.
While a personal loan can provide needed cash, carefully consider the impact on your overall financial picture first.
Other Options For Covering Closing Costs
If you don’t want to take out a separate loan, here are some other options for covering closing costs:
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Use your tax refund – If you’re getting a refund, ask your lender if you can use it toward closing costs.
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Borrow from retirement accounts – You can take a 401(k) loan or hardship withdrawal. Just be aware you’ll pay fees and lose growth.
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Negotiate seller contributions – Sellers can contribute a percentage of the home price – ask for help with closing costs.
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Mortgage lender credits – Some lenders offer credits toward closing costs – shop around for deals.
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Down payment assistance programs – First-time buyers may qualify for down payment grants and low interest second loans.
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Roll into loan – You can finance closing costs in the mortgage. You’ll pay interest over the long run but won’t need cash upfront.
The Pros And Cons Of Rolling Closing Costs Into Your Mortgage
Rolling closing costs into your mortgage loan avoids the need to pay cash upfront. However, there are some tradeoffs:
Pros:
- Don’t need cash on hand for closing day
- Can still keep your down payment savings intact
- Makes homebuying more affordable overall
Cons:
- Closing costs get added to the loan balance
- You pay interest on the fees over the loan term
- Increases your monthly mortgage payment
- Results in more interest paid over the life of the loan
Whether it makes sense depends on your personal situation. If you have the cash, paying costs upfront saves money long term. But rolling costs in could be your only option.
How To Decide If You Should Take Out A Loan For Closing Costs
Determining if you should take out a separate loan boils down to affordability. Consider these tips:
- Review your budget to see if you can afford another monthly loan payment
- Calculate your debt-to-income ratio including the new loan payment
- Get preapproved for your mortgage before applying for a personal loan
- Understand how increased debt could impact your loan approval
- Compare interest rates on financing options like personal loans or 401(k) loans
- Calculate the total interest costs of rolling fees into your mortgage
- See if alternatives like seller credits or down payment help are available
Ideally, a separate loan for closing costs should only be a last resort if you’ve exhausted all other options. Paying cash upfront or rolling costs into your mortgage usually makes more financial sense.
Talk To Your Lender First
Before taking out any new debts prior to closing, be sure to talk to your mortgage lender first. Let them know your plan so they can advise you if it will jeopardize your approval.
Bringing large new loan payments to the table could raise red flags and cause issues. You want to avoid any surprises that could put your home purchase at risk.
The Bottom Line
Yes, you can take out a personal loan to cover closing costs on a home purchase. But carefully weigh the pros and cons first, as increased debt can negatively impact mortgage approval.
Explore all your options and compare interest rates. If possible, try to pay closing costs in cash or roll them into your mortgage loan to avoid a separate loan payment. But a personal loan can provide funds if you have no other choice. Discuss your specific situation with lenders to make the best decision for your finances.
Can you include closing costs in a mortgage refinance?
Some lenders also offer no-closing-cost refinance loans. Like no-closing-cost mortgage loans, lenders often cover these fees by rolling them into your loan amount, offering lender credits or raising your APR.
Before folding your closing costs into a refinance loan, you may want to check how this would affect your debt-to-income ratio, which is your total monthly debts divided by your total monthly income. If your DTI is too high, it can affect the quality of your loan terms and chances of home loan approval.
Also, check how including closing costs would affect your loan-to-value ratio, which is your loan balance divided by the appraised value of your home. Generally, you can’t take out more than 80% of your LTV with a cash-out refinance. And if your LTV is above a certain amount, you may need to pay private mortgage insurance, which increases your monthly mortgage payments.
How to estimate closing costs
Your closing costs can vary based on your lender, your loan type and terms, the amount you’re borrowing, your down payment, your interest rate, where you live and the homeowners insurance you purchase. You can use Credit Karma’s closing costs calculator to estimate the fees and taxes you’ll need to pay at closing.
Can a Loan be used to pay for Closing Costs?
FAQ
Should I get a personal loan for closing costs?
Is it smart to finance closing costs?
Can you use a personal loan to close on a house?
Can closing costs be negotiated?
Can you get a personal loan for mortgage closing costs?
Borrowers with good credit may get a personal loan for mortgage closing costs. Bringing personal loan money to the closing table can help you finalize your home purchase. Some lenders, however, may deny your mortgage loan application during the closing process if you borrow large sums of money to cover your closing expenses.
Can I borrow money for closing costs?
This expense can be paid out of pocket via cash or a personal loan or wrapped up into the mortgage. If it’s included in the mortgage, you’ll end up paying interest on this amount over the life of the loan. If you don’t have the cash to pay for closing costs, you may be wondering if you can borrow the money.
Do you pay closing costs if you buy a house?
Closing costs are fees your lender charges on top of your down payment when you close a mortgage loan. They’re usually about 2% to 5% of the home’s purchase price. As the buyer, you typically pay all closing costs, but the seller may cover some of them depending on your state’s laws and how you negotiate the contract.
How do lenders make up for no closing costs?
Generally, lenders make up for “no closing costs” by adding these fees to the total loan amount or charging a higher interest rate. Some lenders may offer you lender credits to cover some or all of your closing costs, but once again, accepting these lender credits typically raises your interest rate or increases your loan amount.