Can You Include Closing Costs in Your Mortgage Loan?

Buying or refinancing a home often involves significant upfront closing costs. These costs include fees for the lender, appraisal, title search, survey, attorney, recording documents and more. For many homebuyers and refinancers, coming up with large lump sums for closing can be a major obstacle.

Fortunately, there are ways to include your closing costs directly in the mortgage loan itself This practice, known as “rolling closing costs into the loan” or “financing closing costs”, allows you to avoid large out-of-pocket expenses at closing

In this comprehensive guide, we’ll explain everything you need to know about including closing costs in your mortgage loan.

What Does It Mean to Roll Closing Costs Into a Loan?

Rolling closing costs into your loan simply means adding the amount of your closing costs to the total loan amount you borrow. For example:

• Home purchase price: $200,000
• Estimated closing costs: $5,000
• Loan amount: $205,000

Instead of bringing $5,000 cash to closing, you borrow an extra $5,000 to cover the closing costs. This leaves more money in your bank account.

Rolling in the closing costs increases your loan balance and monthly mortgage payment slightly. But it prevents you from needing a large lump sum on closing day.

Is Including Closing Costs in the Loan Amount Allowed?

Most mortgage lenders will allow you to roll closing costs into the total loan amount. However loan programs and products can differ in their policies.

Conventional loans offered by Fannie Mae and Freddie Mac allow closing costs to be financed into the mortgage up to certain limits. FHA, VA, and USDA loans also permit closing costs to be rolled in, within program guidelines.

That said, some lenders may choose not to allow this practice even when the loan program does. So it’s important to ask each individual lender about their policies.

How Does Rolling Closing Costs Into a Loan Work?

Financing closing costs into your mortgage is straightforward. Here are the basic steps:

1. Estimate your closing costs – Your lender can provide an estimate of expected closing fees at the start of the mortgage process. Third-party closing cost calculators can also help.

2. Increase loan amount to cover costs – Notify your lender you want to roll in the closing costs. They will increase the loan amount you’re approved to borrow by that figure.

3. Bring less cash to closing – On closing day, you’ll now have to bring only the down payment, instead of down payment plus closing costs.

4. Loan documents reflect new loan amount – Your final loan documents, like the Closing Disclosure, will show the updated loan amount that covers closing costs.

5. Pay interest and repay as usual – Your monthly payments will be slightly higher to account for the financed closing costs. You’ll repay this amount, plus interest, over the full loan repayment term.

It’s a simple way to keep more cash in your pocket upfront when buying or refinancing.

What Closing Costs Can Be Included in a Loan?

Virtually any closing cost can be rolled into your mortgage loan. Here are some of the most common:

• Origination fee – This upfront fee pays for the lender’s work in processing your loan application and underwriting your mortgage.

• Appraisal fee – Covers the cost of the appraiser who values the home.

• Credit report fee – A small fee for the lender to access your credit reports.

• Title fees – Paid to a title company for researching liens against the property.

• Recording fees – Charged by local courts to record your home’s deed and mortgage documents publicly.

• Prepaid taxes and insurance – Many months of property taxes and homeowners insurance premiums required at closing.

• Points – Upfront interest charges that lower your ongoing mortgage rate.

Virtually any fee listed on your Loan Estimate or Closing Disclosure can likely be financed into the loan. Always double check with your specific lender for their policies though.

Are There Limits on How Much You Can Finance?

Most lenders do limit the maximum amount of closing costs you can include in the mortgage to prevent excesses. Guidelines vary by loan type.

For conventional loans, Fannie Mae and Freddie Mac cap closing costs at 3% of the total loan amount. So on a $200,000 loan, you could roll in up to $6,000 of costs.

FHA loans allow at least 3.5% of the mortgage amount to cover closing fees. So on a $200,000 FHA loan, you could add $7,000 toward costs.

Always communicate with your lender to confirm the amounts you can roll in under program and product guidelines.

The Pros of Including Closing Costs in a Mortgage

Rolling closing fees into your loan offers some nice perks:

You avoid large upfront costs – For many borrowers, coughing up thousands in cash for closing is tough. Including the costs in the loan prevents this.

You keep more money liquid – Rolling in costs leaves more of your own cash untouched, like for moving, renovations, or an emergency fund.

Makes lower down payments easier – If you put down less upfront, you’ll have even less available for closing. Financing costs solves this.

Easier to manage long-term payments – Smaller monthly mortgage payments may fit your budget better than one large closing bill.

Helpful if selling current home – If proceeds from selling your current house will fund the down payment on the next, you may have less available upfront for closing.

As long as you’re comfortable with the slightly higher loan amount and monthly payments, rolling in costs can make the closing process much smoother.

The Cons of Financing Closing Costs

While rolling closing fees into your mortgage has advantages, there are some potential drawbacks to note as well:

Higher loan amount and payments – Your principal balance and monthly payments will be higher over the loan term.

More interest paid – You’ll wind up paying interest on the closing costs over the full loan repayment period.

Reduced home equity – Starting with a higher loan balance means you have less equity in the home from day one.

Potentially higher mortgage insurance – If required, mortgage insurance premiums are based on the initial loan balance.

May not be permitted – Some loan programs or lender policies restrict the practice of financing closing costs.

Other options available – Seller credits or lender credits may cover costs without the need to roll them into loan.

The impact of these cons can vary greatly depending on your loan amount, interest rate, and other factors. Do the math to make sure it makes overall financial sense in your unique scenario.

How Much More Does It Cost to Finance Closing Costs?

Although rolling fees into the loan saves money upfront, you do pay more over the long haul by adding to your principal and interest payments. But how much more?

The increase depends on the specific loan amount, closing costs, and interest rate. But let’s look at an example:

• Loan amount: $200,000
• Closing costs: $5,000
• Interest rate: 5%
• Term: 30 years

If you finance in the $5,000 of closing costs:

• Your new loan balance becomes $205,000
• Monthly principal & interest increases by about $26
• You pay $9,360 in extra interest over the loan term

So on this hypothetical mortgage, rolling in $5,000 of closing costs increases your total interest payments by around $9,000 over 30 years.

Always model out the numbers with your own figures to see the true cost difference when including closing fees in your loan amount.

Strategies to Offset Higher Costs When Financing Closing Costs

If you want to reap the benefits of rolling closing costs into the loan but also want to minimize the higher long term costs, a few strategies can help:

• Shop for the lowest rate possible – A lower rate will reduce the extra interest you pay on the financed closing costs.

• Ask about lender credits – Some lenders will offer credits to help cover closing costs in exchange for a slightly higher rate.

• Split closing costs with seller – If possible, negotiate to have the seller pay a portion of the closing fees for you.

• Pay some costs in cash – If you can pay a few thousand toward costs in cash, finance a smaller amount.

• Shorten the loan term – Going with a 15 or 20 year mortgage means you pay the interest over a shorter window.

• Make extra principal payments – Making an extra payment annually can wipe out the increased amount faster.

Planning ahead and modeling a few different scenarios can help you offset the long-term costs of rolling in closing expenses.

Are There Alternatives to Financing Closing Costs?

If your loan program or lender doesn’t allow closing costs to be rolled in, or you want to avoid the