Buying a home is an exciting milestone in life, but it also comes with significant costs beyond just the purchase price. On top of your down payment you’ll also have to pay closing costs which can add thousands of dollars to your total homebuying expenses.
As a first-time homebuyer with limited savings paying these upfront fees can feel daunting. The good news is that many lenders allow you to include closing costs in your mortgage loan. While this avoids large out-of-pocket expenses at closing it does increase your total borrowing costs over the long run.
In this comprehensive guide. we’ll explain everything you need to know about rolling closing costs into your mortgage including
- What are closing costs?
- Pros and cons of including closing costs in your loan
- How rolling closing costs into a mortgage works
- Types of closing costs you can finance
- Lenders that allow closing costs to be included in the loan
- Alternatives to pay closing costs if you can’t roll them into the loan
What Are Closing Costs?
Closing costs refer to the fees charged by lenders and third parties to process, underwrite, and close your mortgage loan. These costs are paid at closing, in addition to your down payment.
Closing costs typically range from 2% to 5% of the total mortgage amount. For example, if you take out a $200,000 mortgage, expect to pay $4,000 to $10,000 in closing costs.
Common closing costs include:
- Origination fee – Fee charged by the lender to originate the loan, usually 1% of the loan amount
- Appraisal fee – For the appraiser’s assessment of the property’s value
- Credit report fee – For the lender to access your credit report
- Title insurance fee – Insures the lender against claims against the title of the property
- Recording fees – To legally record the deed with local authorities
- Transfer taxes
- Attorney fees
Closing costs can vary significantly based on your lender, loan type, credit, and property location. Government-backed loans like FHA and VA also have unique closing cost rules.
Pros and Cons of Including Closing Costs in Your Loan
The main advantage of rolling closing costs into your mortgage loan is that you avoid large out-of-pocket expenses at closing. This preserves more of your upfront cash.
However, there are some downsides:
Pros
- Preserve cash at closing
- May allow you to buy sooner if you have limited savings
- Helpful if you need loan proceeds to cover repairs
Cons
- Interest charges mean you pay more over the loan term
- Higher monthly mortgage payments
- Reduced home equity and cash-out potential
As you can see, while rolling in closing costs avoids upfront fees, you pay for it through higher long-term borrowing costs. Carefully weigh the pros and cons based on your personal financial situation.
How Does Rolling Closing Costs into a Mortgage Work?
If your lender allows it, they’ll simply add your estimated closing costs to the principal mortgage balance. So if you borrow $200,000 to buy a home, and have $5,000 in closing costs, the total loan amount would be $205,000.
Rather than pay closing costs out of pocket, they get wrapped into your mortgage debt and paid off over time through your monthly payments.
The lender recoups the closing costs by charging interest on the higher loan balance. This increases your total interest charges over the loan.
What Types of Closing Costs Can Be Financed?
Most lenders allow recurring closing costs to be rolled into the mortgage principal, including:
- Origination fees
- Appraisal fees
- Credit report charges
- Title insurance fees
- Recording fees
- Transfer taxes
However, prepaid costs like property taxes, homeowner’s insurance, and HOA dues usually cannot be financed.
If your loan program has maximum loan-to-value (LTV) or debt-to-income (DTI) limits, rolling closing costs into the mortgage could push you over those thresholds. Discuss options with your lender if this is a concern.
Lenders That Allow Closing Costs to Be Included in the Loan
Most national lenders and banks allow closing costs to be rolled into purchase mortgages and refinances, including:
- Wells Fargo
- Chase
- Quicken Loans
- loanDepot
- Fairway Independent Mortgage
- Guild Mortgage
Smaller regional and local lenders also often allow closing costs to be financed into mortgages. Shop around with a few lenders to compare options and mortgage rates.
Government-backed loans like FHA, VA, and USDA also permit closing costs to be included in the total mortgage amount, within certain LTV limits.
Alternatives If You Can’t Finance Closing Costs
If your loan program or lender prohibits rolling closing costs into the mortgage, here are some potential alternatives:
- Pay with your own savings
- Negotiate seller contributions
- Use gift funds from family
- Seek down payment assistance grants
- Increase your down payment to lower the mortgage amount
- Shop around for lower closing costs
While closing costs can feel overwhelming for first-time homebuyers, know that you have options if you don’t have the cash. Explore whether you can finance closing costs into your mortgage to buy your dream home sooner.
A calculator can show expenses vs savings
If you’ve already submitted a loan application, the Loan Estimate from your lender should show your new loan’s long-term costs. Likewise, the Closing Disclosure, which you should receive at least three business days before closing, will detail closing costs.
But how can you compare these costs before making a new mortgage application?
A refinance calculator can help show the savings you’ll see by refinancing. You can compare those savings with and without the extra closing costs added to your new loan’s principal.
A calculator can help you see the difference between mortgage rates before you submit a loan application.
What does it mean to roll closing costs into your loan?
Including closing costs in your loan — or “rolling them in” — means you are adding the closing costs to your new mortgage balance.
This is also known as financing your closing costs. Lenders may refer to it as a “no-cost refinance.”
Financing your closing costs does not mean you avoid paying them. It simply means you don’t have to pay them on closing day.
If you don’t want to empty your savings account at the closing table — and if your new mortgage rate is low enough that you’ll still save money — financing your closing costs over the term of your mortgage might be a good strategy.
But the big downside is that you end up paying interest on your closing costs, which makes them more expensive in the long run.
So if you’re able to pay closing costs in cash, that’s typically the best move.
Are Closing Costs Included in Mortgage? Can Closing Costs be Included in Loan?
FAQ
Are closing costs factored into the loan?
Does a loan estimate include closing costs?
Can closing costs be included in an FHA loan?
Can I put closing costs on a credit card?