Purchasing a home comes with myriad upfront costs – inspection fees, appraisal charges, title insurance, and more. These expenses, collectively called closing costs, can range from 2-5% of the total loan amount. For a $300,000 mortgage, you could pay $6,000-$15,000 in closing fees alone. As a buyer, covering these substantial charges can be a major burden. So can you roll closing costs into your home loan?
The short answer is yes – many lenders allow borrowers to include closing fees in the total mortgage amount through “no closing cost” loans. However, this convenient option comes at a price over the long run. In this guide, we’ll break down how rolling closing costs into your home loan works, the pros and cons, and tips for minimizing the impact.
What Are Closing Costs?
Closing costs refer to the various administrative and processing fees charged by lenders when finalizing a mortgage These expenses include
- Origination fees – Charges for processing loan application and underwriting
- Appraisal/inspection costs – Covers home appraisal and inspections
- Title fees – Covers title search, insurance, escrow services
- Taxes – Recording fees, transfer taxes
- Prepaids – Homeowners insurance, property taxes, interest
- Other – Credit check, flood certification, document fees
Closing fees can range from 2-5% of the total loan amount. For a $300,000 mortgage, expect to pay $6,000-$15,000 in closing costs as the buyer.
Can You Include Closing Costs in a Mortgage?
Many lenders allow borrowers to roll closing costs into the total loan amount through “no closing cost” mortgages.
With these loans, instead of paying fees upfront, the lender covers closing costs by:
- Increasing the mortgage amount to include the fees
- Offering lender credits to offset charges
- Charging a higher interest rate
You avoid large closing charges but end up paying more over the loan term through a higher principal and/or interest rate.
Pros of Rolling Closing Costs Into a Loan
Including closing fees in your mortgage amount offers these advantages:
- No upfront costs – Avoid large out-of-pocket charges at closing
- Lower down payment – Put less money down by rolling fees into loan
- Easier qualification – Including costs can help you meet loan-to-value requirements
- Lower monthly payments – Spreading fees over loan term reduces monthly burden
For buyers lacking in savings, rolling costs into the loan can make financing a home purchase more feasible.
Cons of Rolling Closing Costs Into a Loan
While convenient, here are some potential drawbacks to keep in mind with no closing cost loans:
- Higher loan amount – You borrow more and pay interest on a larger principal
- Higher interest rate – Lender may increase rate to offset covering closing costs
- Longer loan term – You make payments longer due to higher balance
- Difficulty refinancing – Higher loan-to-value ratio may complicate refinancing
In most cases, you end up paying more over the life of the loan when closing costs are included.
Tips for Minimizing the Impact When Including Fees
If rolling closing costs into your mortgage makes sense for your situation, here are some tips to reduce the long-term costs:
- Shop lenders – Compare quotes to find the best rates and terms
- Ask about discounts – Negotiate with lenders to lower or waive certain fees
- Look into down payment assistance – Grants can help cover costs for eligible borrowers
- Improve your credit – A higher score means better rates from lenders
- Make additional payments – Paying extra monthly can shorten the loan term
Taking these steps can help offset some of the additional interest paid when closing costs are rolled in.
The Bottom Line
While wrapping closing fees into your mortgage amount avoids large upfront charges, it also increases your total interest paid over the long run. But for some buyers, the trade-off makes financing a home purchase possible in the first place.
Carefully weigh the pros and cons for your situation and budget. Be sure to shop multiple lender quotes and negotiate the best terms possible. With the right prep, including closing costs in your home loan can be an acceptable compromise.
Which closing costs can be financed into the loan?
Not all closing costs can be financed in the mortgage loan. By knowing and understanding which ones can be rolled in, buyers can navigate this aspect of the homebuying process with clarity and confidence.
Here are some of the costs you can typically finance into the loan:
- Loan origination fee: An upfront fee charged by the lender. Other lender fees may include processing fees, underwriting fees, and application fees
- Discount points: Cash you’d pay upfront to lower your new refinance rate
- Credit report fee: A fee charged to your lender to access your credit score
- Title fees/title insurance: Fees charged, usually by an attorney or title company, for the title search which ensures no one else can claim ownership of your home (owner’s title insurance protects you in case someone claims ownership later)
Other closing costs cannot always be rolled into the loan. These include items like prepaid property taxes, a homeowners insurance policy, and HOA dues. Rules vary by loan program.
If you need your new loan to cover these costs, too, let your loan officer know in advance so you can learn about your best options.
You probably won’t be able to roll in the home appraiser’s fee since it’s charged earlier in the closing process.
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.
As long as rolling the costs into your mortgage doesn’t impact your debt-to-income (DTI) or loan-to-value (LTV) ratios too much, you should be able to do it.
As an example, let’s say your new loan amount is $400,000, excluding closing costs:
- If your home is worth $500,000, your LTV is 80% (because your new loan amount of $400,000 is 80% of the home’s total value of $500,000)
- If your refinance lender won’t let you borrow more than 80% LTV, you won’t have enough room to roll in the closing costs. Even if your lender will let you cross this 80% LTV threshold, the new loan would require private mortgage insurance (PMI) premiums
On the other hand:
- If you owe $300,000 and your home worth $500,000, your new loan’s LTV would be 60%
- If the lender allows you to borrow up to 80% LTV ($400,000), you should have plenty of room to roll in the closing costs, if you want
Keep in mind that rolling closing costs into your mortgage means you’ll pay interest on them in the long run. Still, this can be a good option when you want a lower rate but can’t afford the upfront fees to refinance.
Closing Costs Explained Visually
FAQ
Can closing costs be rolled into a mortgage with FHA?
Can down payment be rolled into a mortgage?
Do closing costs include first mortgage payment?
Can I put closing costs on a credit card?