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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Buying a home is an exciting process, but it also comes with many fees called closing costs These fees must be paid when you close on the home, and they can total 2-5% of the purchase price. Coming up with thousands of dollars in cash for closing costs can be a challenge for many buyers If you’re wondering, “Can I add closing costs to my mortgage loan?” the answer is maybe. Here’s what you need to know.
What Are Closing Costs?
When you buy a home closing costs are fees charged by various parties involved in the transaction. These fees can include
- Origination fee – Charged by the lender to process the loan
- Appraisal fee – For the appraiser to inspect the home
- Credit report fee
- Title insurance fee
- Recording fees
- Transfer taxes
- Prepaid property taxes
- Homeowners insurance premiums
- Home inspection fees
- Attorney fees
Closing costs typically range from 2-5% of the purchase price. On a $300,000 home, you may pay $6,000-$15,000 in closing costs. Coming up with this much cash can be difficult, leading buyers to wonder if they can roll the costs into the mortgage loan.
Can You Add Closing Costs to a Mortgage?
Whether you can add closing costs to the mortgage depends on the type of loan you get. Here are the most common options:
Conventional Loans
Most conventional lenders do allow you to finance closing costs into the mortgage. However, doing so increases your loan amount and interest charges over the life of the loan. It’s usually better to pay closing costs upfront if you can afford it.
FHA Loans
FHA loans make it easy to include closing costs. In fact, the 1.75% upfront mortgage insurance premium is always rolled into the loan amount. You can also finance other closing costs to avoid high out-of-pocket fees.
VA Loans
Like FHA loans, VA loans let you roll the entire funding fee into the loan balance. Any other closing costs can also be added to the loan amount.
USDA Loans
For USDA loans, you can finance upfront guarantee and technology fees into the loan amount. Other closing costs may also be eligible depending on loan-to-value ratio.
How Does Financing Closing Costs Work?
If your lender allows it, financing closing costs is straightforward:
- Your lender calculates total closing costs
- Those costs are added to the loan amount
- You bring less cash to closing, but have a higher mortgage balance
For example, say your loan amount is $200,000. But closing costs total $6,000. The lender simply increases the loan to $206,000 to cover those fees.
While this saves cash upfront, be aware you’ll now pay interest on the closing costs over the life of the loan. This increases your long-term costs.
Our mortgage calculator can help you estimate the impact of financing closing costs vs paying them upfront.
Pros and Cons of Adding Closing Costs to a Mortgage
Financing closing costs into the loan has advantages and disadvantages:
Pros
- Saves cash needed at closing
- Allows you to buy when short on funds
- Keeps more money in your bank account
Cons
- Increases loan balance and interest charges
- Causes you to pay more over loan term
- Decreases the amount of home equity
Look at the pros and cons to decide if rolling fees into the loan makes sense for you. Our closing cost calculator can help compare total costs.
Lenders That Allow Closing Costs to Be Added to Loan
Most lenders will let you finance at least some closing costs into the mortgage loan. However, check with individual lenders to confirm their specific policies.
Some lenders known for offering flexibility with closing costs include:
- Quicken Loans – Allows fees to be rolled in
- loanDepot – Offers “mello” loans that cover closing costs
- Fairway Independent Mortgage – Will finance many closing fees
- Guild Mortgage – Provides options for limited cash buyers
Reach out to multiple lenders to shop and compare closing cost policies. A good mortgage broker can also help you identify the best lender for your needs.
Alternatives to Paying Closing Costs Upfront
If you can’t or don’t want to finance closing costs into the mortgage, here are a few other options to consider:
- Negotiate seller credits – Ask the seller to pay some closing costs
- Use gift funds – Receive gift money from family toward costs
- Increase mortgage rate – Pay a higher rate in exchange for lender credits
- Use grant programs – Look into downpayment or closing cost assistance
These alternatives can help you buy a home even if you don’t have sufficient cash. Explore all available options to make homeownership affordable.
FAQ About Adding Closing Costs to a Mortgage
Can first-time home buyers add closing costs to their loan?
Yes, first-time buyers can absolutely finance closing costs into the mortgage if the lender permits it. FHA loans, in particular, make this easy for new buyers.
Do closing costs added to a loan increase your interest rate?
No, your interest rate does not go up when closing costs are added to the loan amount. However, because your loan balance is higher, you will pay more interest over the life of the loan.
Is it smart to add closing costs to a mortgage?
Financing closing costs makes sense for some buyers but not others. If you don’t have the cash, it can allow you to buy now. But understand you’ll pay interest on those costs over time. Do the math to see if it’s right for you.
Can you add closing costs to a refinance?
Yes, it’s common to finance closing costs into a refinance loan. This avoids high upfront costs when refinancing. Just be sure the increase in loan amount still fits within your lender’s guidelines.
What closing costs can be added to a mortgage?
Common fees that can be financed include origination fees, discount points, credit reports, appraisals, title charges, prepaid interest, and more. Ask your specific lender which closing costs are eligible.
Should I add closing costs to my mortgage?
It depends on your personal situation. If you need to conserve cash for the down payment and closing, financing costs may be your best option. But try to pay upfront if you can, since you’ll save on interest charges.
Wrap Up
Financing closing costs into your mortgage is allowed by many lenders. This can help you buy a home or refinance when short on cash. However, understand you’ll pay interest on those fees over the loan repayment period. Do the math to see if rolling closing costs into your mortgage makes good financial sense for your situation.
Common closing costs for a buyer
At least three days before closing, your lender will send you a document listing the closing costs you’ll need to pay. This list is called a Closing Disclosure or a final loan estimate. Your Closing Disclosure might break up your expected closing costs into two categories: loan costs and other related closing fees.
Loan costs often include the origination or application fee, underwriting fees, discount points, attorney fees, appraisal fees, title-related costs and credit report expenses. You’ll likely pay property taxes, homeowners insurance, recording fees, transfer tax, HOA fees and flood insurance if needed.
Don’t have enough savings to cover closing costs? Sometimes you can include closing costs in the loan, but you’ll likely end up paying more for the loan in the long run.
On top of a down payment, taxes, lender fees and points, closing costs can add thousands of dollars to the cost of a mortgage loan. If you’re looking to avoid paying these fees upfront, it may be possible to roll them into the loan itself.
Some lenders will waive closing costs or let you fold them into the loan — this is sometimes called a no-closing-cost mortgage. But doing this can increase your APR and overall loan amount, which means you may pay even more in the end.