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Purchasing a home is typically one of the largest purchases in a personâs lifetime. Additionally, a lot of people wonder if they can use a credit card to potentially earn rewards on these big transactions because buying a home comes with significant closing costs.
Generally, the answer to this question is no. Â Mortgage lenders and title companies typically donât accept credit cards as payment for closing costs. Usually, youâll need to use a wire transfer or cashierâs check to pay closing costs.
If you have a sign-up bonus to meet and have recently opened a new credit card, that can be a bummer. However, since credit card processing fees can be high given that closing costs are typically large transactions, credit cards are typically not accepted for mortgage closing costs because mortgage lenders and title companies don’t want to bear the expense.
However, there are certain closing cost expenses—like fees for your application, credit report, and appraisal—that you may be able to pay with a credit card before you even get to the closing table. Alternatively, you might be able to use a credit card to cover part of the closing costs and a wire transfer or cashier’s check for the remaining amount.
Letâs look into mortgage closing costs and which closing costs you can potentially cover with a credit card.
The fees and expenses associated with purchasing a home that you must pay when the seller transfers title to the buyer are known as mortgage closing costs.
Closing costs are variable and depend on the type of loan, location, and type of home. However, you can anticipate paying between 2% and 5% of the purchase price of the home. For example, on a $300,000 home, youâll pay $6,000 to $15,000 in closing costs.
Your mortgage lender will provide you with a loan estimate and closing disclosure outlining your closing costs prior to the closing table. Together with seller contributions, prior payments, such as deposits, and your estimated cash to close—which is the total of your down payment and closing costs less any adjustments—it will also include
Youâll generally have to pay closing costs up front when you close on your mortgage. Before you reach the closing table, you might have to pay for certain costs like application fees, home inspection or appraisal fees. Â.
Buying a dream home is exciting, but navigating the world of closing costs can feel like a maze. You’re probably wondering, “Can I use my trusty credit card to conquer this financial hurdle?” Well, the answer is a bit more nuanced than a simple yes or no
The Short Answer:
Yes, you can use your credit card to pay for some closing costs, but there are limitations and it’s not always the most optimal approach.
The Long Answer:
Let’s delve into the details to help you make an informed decision.
What are Closing Costs?
The fees related to completing your mortgage and formally transferring ownership of the property are known as closing costs. Usually, they vary between 2% and 5% of the loan amount, contributing up to a noteworthy portion of the change.
Which Closing Costs Can You Charge?
The good news is that some closing costs, which are normally paid in advance of the actual closing date, may be eligible to be paid with your credit card. These may include:
- Home inspection: This crucial step helps you uncover any potential issues with the property before you commit.
- Appraisal report: This document verifies the property’s value and ensures it aligns with the purchase price.
- Homeowner’s insurance premium: Protecting your new investment with insurance is essential, and the first year’s premium is often due at closing.
- Interest rate lock: Securing a fixed interest rate for your mortgage provides peace of mind and protects you from market fluctuations.
- Credit report: Your lender needs to assess your creditworthiness, and this fee covers the cost of obtaining your credit report.
Limitations to Consider:
While using a credit card for some closing costs might seem convenient, there are limitations to keep in mind:
- Timing: You can only charge these costs before closing, not at the closing table itself.
- Customary Fees: The charges must be customary and typically paid before closing.
- Loan Amount Limit: The total amount you can charge to your card is capped at 2% of your loan amount. For example, if your loan is $350,000, the maximum you can charge is $7,000.
- Sufficient Funds: You need to have enough money in your bank account to cover the charges.
Potential Drawbacks:
While using a credit card for closing costs offers some flexibility, there are potential downsides to consider:
- Interest Charges: If you don’t pay off the balance promptly, you’ll incur interest charges, adding to the overall cost.
- Impact on Credit Score: A large credit card balance can negatively impact your credit score, potentially affecting your future borrowing ability.
- Missed Opportunities: Using your credit card for closing costs might prevent you from utilizing it for other essential expenses or taking advantage of rewards programs.
Alternatives to Consider:
Before reaching for your credit card, explore other options that might be more financially advantageous:
- Cash Savings: Having sufficient cash reserves is the most straightforward and cost-effective approach.
- Personal Loan: A personal loan with a lower interest rate than your credit card could be a viable option.
- Gift Funds: If you’re fortunate enough to receive gift funds from family or friends, you can use them towards closing costs.
The Bottom Line:
Using a credit card for closing costs can be a viable option under certain circumstances. However, it’s crucial to weigh the limitations, potential drawbacks, and alternative options before making a decision. Carefully consider your financial situation, creditworthiness, and overall budget to determine the most suitable approach for you.
Remember, buying a home is a significant investment. In order to successfully navigate the closing costs maze and make the best financial decisions for your dream home, take your time, do your research, and consult with financial experts.
Using a Credit Card for a Down Payment on a House
The majority of lenders do not accept credit cards as payment for a down payment, so don’t plan on using one to make your down payment for a house. A bank account or other verified fund source, like a retirement account or a well-documented gift from a family member, is usually required by mortgage lenders for the down payment.
If you don’t have the immediate funds to pay it off, using a credit card for a down payment on a house might not be the best option. Since credit card interest rates are significantly higher than those of a typical mortgage, it makes more sense to pay a higher down payment on your mortgage rather than financing it with a credit card. Â.
You might be able to use gifts from family members or down payment assistance programs, some of which also help with closing costs, if you need assistance with making a down payment for a house.
Rolling Closing Costs Into Your Mortgage
You may be able to finance closing costs as part of your mortgage. However, not all lenders allow you to do so. Additionally, since mortgage companies won’t lend you more than the house is worth, it depends on the appraisal of the property. Â.
In the event that the closing costs and purchase price exceed the home’s appraisal value, the mortgage company is unlikely to approve your closing costs financing unless you have a sizable down payment to cover the shortfall.
If you roll closing costs into your mortgage, you can avoid paying for closing costs upfront. However, youâll pay interest on the closing costs you financed, and it will increase your monthly mortgage payments.
Some lenders offer a no-closing-cost mortgage with a higher interest rate than a comparable mortgage. You won’t have to pay closing costs up front, which can make it easier for you to purchase a home even though you’ll pay more interest over the course of the loan.
Can a Loan be used to pay for Closing Costs?
FAQ
Can you use your credit card when closing on a house?
Can closing costs be paid by credit card?
Do they pull your credit the day of closing?
Can you use a credit card for house downpayment?
Can you pay closing costs with a credit card?
Regular on-time payments and lower credit card balances can increase your credit score, which makes it easier to get approved for a mortgage at the best rates. You can pay some, but not all, closing costs using a credit card. But even if you can, should you? Here’s a look at all of your options.
How do I pay for my closing cost?
The only thing these cannot pay for is your down payment. You can use any combination of the three aforementioned methods to pay for your closing cost. For example, you can have a lender credit that covers some costs, the seller could pay for some costs via concessions, and you can then write a check for the remaining balance.
Can I bring cash to closing?
Technically you can’t bring cash to closing; instead you need to bring a check, certified funds, do a wire transfer, etc. Watch our Closing video for the proper methods for paying costs at closing. For refinance home loans you can increase the loan amount (assuming there’s room in the LTV) to pay for the closing costs.
Are closing costs included in my loan amount?
Closing costs generally are not included in your loan amount. It’s important to understand that closing practices differ widely from one place to another. In some localities, buyers and sellers are free to negotiate certain fees.