Can I Roll My Closing Costs Into My Mortgage? A Comprehensive Guide

Buying or refinancing a home often involves significant upfront costs known as closing costs These fees can range from a few thousand dollars to tens of thousands, depending on the loan type, property value, and lender While paying these costs out of pocket is the traditional approach, many borrowers wonder if they can roll these expenses into their mortgage instead.

Yes, you can frequently include your closing costs in your mortgage. This entails adding the closing costs to the loan amount, which you will subsequently pay back with interest over the mortgage’s term. Even though this option might be tempting to people who lack the funds to pay closing costs up front, it’s crucial to weigh the benefits and drawbacks before choosing.

Pros and Cons of Rolling Closing Costs into Your Mortgage

Pros:

Reduced upfront costs: This is the primary advantage of rolling closing costs into your mortgage. By financing these costs, you avoid the need to pay a large sum upfront, freeing up your cash for other expenses or investments.
Lower monthly payments: In some cases, rolling closing costs into your mortgage can result in lower monthly payments compared to paying them upfront. This is because the closing costs are spread out over the life of the loan, reducing the impact on your monthly budget.
No need to delay closing: If you don’t have the cash for closing costs, rolling them into your mortgage can prevent delays in closing on your home purchase or refinance.

Cons:

Higher total cost: Rolling closing costs into your mortgage means you’ll pay interest on those costs over the life of the loan. This can significantly increase the total cost of your mortgage compared to paying them upfront.
Increased loan amount: Adding closing costs to your loan amount increases the overall loan size, which can impact your debt-to-income ratio (DTI). A higher DTI can make it more difficult to qualify for other loans in the future.
Less equity: By rolling closing costs into your mortgage, you’re essentially borrowing against your home equity. This means you’ll have less equity in your home, which can impact your ability to refinance or sell your home in the future.

How to Roll Closing Costs into Your Mortgage

If you’re considering rolling closing costs into your mortgage, here are a few things to keep in mind:

Not all lenders allow it: While many lenders offer this option, not all do. It’s important to check with your lender to see if they allow rolling closing costs into your mortgage and what their specific requirements are.
Loan program restrictions: Certain loan programs may have restrictions on how much of the closing costs you can roll into your mortgage. For example, FHA loans typically allow for a maximum of 3% of the loan amount to be used for closing costs.
Impact on your DTI: Rolling closing costs into your mortgage will increase your loan amount, which can impact your DTI. Make sure your DTI remains within acceptable limits to avoid jeopardizing your loan approval.

Alternatives to Rolling Closing Costs into Your Mortgage

There are alternative ways to lower your upfront expenses if you decide that rolling closing costs into your mortgage isn’t the best choice for you:

Negotiate with the seller: In a buyer’s market, you may be able to negotiate with the seller to cover some or all of your closing costs. This is known as a seller concession.
Ask for lender credits: Some lenders offer closing cost credits to borrowers who meet certain criteria. These credits can help offset the cost of closing fees.
Shop around for lower closing costs: Compare closing costs from different lenders and service providers to find the best deals.
Use a down payment assistance program: Various government and non-profit programs offer down payment assistance to eligible homebuyers. These programs can help you cover closing costs and other upfront expenses.

Rolling closing costs into your mortgage can be a viable option if you don’t have the cash on hand to pay them upfront. However, it’s important to weigh the pros and cons carefully and consider alternative options before making a decision. By understanding the implications of rolling closing costs into your mortgage, you can make an informed choice that aligns with your financial goals and circumstances.

How to avoid closing costs when you refinance

If you’re refinancing an existing home loan, it’s often possible to include closing costs in the loan amount.

You should be able to roll the costs into your mortgage as long as it doesn’t negatively affect your debt-to-income (DTI) or loan-to-value (LTV) ratios.

As an example, let’s say your new loan amount is $400,000, excluding closing costs:

If your home is worth $500,000. This means that your loan-to-value ratio (LTV) is 80% since the amount of your new loan, which is $4,000,000, represents 80% of the home’s total value of $500,000.
In the event that your refinance lender grants you a higher loan amount than the 80% LTV, you will have sufficient funds to cover the closing costs. Even in the event that your lender allows you to surpass this 80% LTV threshold, the new loan would necessitate private mortgage insurance (PMI) premiums.

On the other hand:

If your property is worth $500k and you owe $300,000, your new loan’s LTV would be $600,000
When the lender permits you to borrow up to 80% of the loan’s LTV ($400,000), you should have enough money to cover the closing costs, if you so choose.

Remember that if you include closing costs in your mortgage, you will ultimately be responsible for paying interest on those costs. Nevertheless, if you want a lower rate but can’t afford the refinancing’s upfront costs, this can be a good choice.

How to avoid closing costs as a home buyer

There may be situations where you are able to include your closing costs into the mortgage itself, depending on the lender and type of loan. But even though you won’t have to pay these costs right away at closing, you will unavoidably pay them—and maybe even more—over the course of the loan.

In most cases, mortgage lenders use a higher interest rate or a larger total loan amount to make up for the lack of upfront closing costs.

Some home buyers can also find other ways to cover the closing costs. For example:

Seek assistance from the home seller: If you include payment for closing costs in your purchase agreement, the seller may cover all or part of them. If you want to request these seller concessions, let your real estate agent know ahead of time.
“Buy up” the interest rate: A “no-closing-cost mortgage” or “lender credits” allow you to pay a higher mortgage rate in exchange for the lender’s assistance with paying closing costs.
Seek assistance from friends and family: The majority of loan types permit the use of gift money, which is cash contributed by close friends or relatives. If you want to use gift money, let your loan officer know in advance.
Apply for grants and loans: A lot of programs assist first-time homebuyers with closing costs and down payments. These initiatives are often local, and their eligibility requirements change.

It’s also important to know that different closing costs can be paid in different ways. Closing costs include a variety of fees — such as attorney fees, underwriting fees, and home appraisal fees.

For instance, if you’re using an FHA loan, the 1. 75% upfront mortgage insurance premium is typically rolled into the loan amount and not paid out of pocket. The same goes for VA loan funding fees.

Ask your lender about which closing costs can be financed and which ones can’t.

Can I Roll My Closing Costs Into My Loan?

FAQ

Is it a good idea to roll closing costs into mortgage?

Rolling closing costs into a loan means that you’re paying interest on those costs over the life of the loan. That means that you’re paying much more for those costs than you would be if you just paid them upfront. Also, if you finance your closing costs, it can’t put your total loan over what you’re approved for.

Can I roll my down payment into my mortgage?

Most lenders will allow you to roll closing costs into your mortgage when refinancing. Generally, it isn’t a question of whether the lender will allow you to roll closing costs into the mortgage. It’s more a question of whether the loan program you’re using will let you roll in closing costs.

Can I put closing costs on a credit card?

You can pay costs by credit card before closing, not at closing. And the fees must be customary, the types that homebuyers typically pay before closing. The closing cost you put on your credit card may not exceed 2% of the loan amount. For example, if your loan amount is $350,000, you could charge up to $7,000.

Can closing costs be rolled into mortgage FHA?

If you’re getting an FHA loan, you can roll the closing costs into the mortgage. While your initial payment will be lessened, you’ll pay them back over time.

Can you roll closing costs into a mortgage?

Each lender has its own policies regarding financing closing costs. It’s essential to ask lenders directly about their specific requirements and options for rolling closing costs into a mortgage. Does rolling closing costs into a mortgage affect the loan amount? Yes, financing closing costs will increase the total loan amount.

Should I include closing costs in my 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.” Check your no-closing-cost options. Start here Financing your closing costs does not mean you avoid paying them.

What are closing costs on a mortgage?

But there’s another expense many home buyers forget to account for: closing costs on a mortgage. Closing costs aren’t universal. Each mortgage lender sets its own fees that are then passed on to borrowers when they finalize their home loans. Typically, closing costs range from 2% to 5% of a borrower’s loan amount.

Do mortgage closing costs increase your interest rate?

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 our editors’ opinions.