Closing costs are a necessary part of getting a mortgage loan, whether for buying a new house or refinancing an existing home loan. These costs can add up, often amounting to several thousand dollars. For many homebuyers and homeowners, coming up with the extra cash to cover these expenses can be challenging. One of the most common questions we get from borrowers is, “Can closing costs be rolled into a mortgage? “The answer is yes, but there are several factors to consider with how much refinance costs are and if you can factor them into the loan, so you don’t have to come out of pocket to cover them.
This is a great way to avoid paying closing costs upfront when buying or refinancing a home is to include them in your mortgage. However, not all banks and mortgage lenders allow you to do this and when they do a certain criteria must be met.
This article will explore how rolling lending fees and closing costs into a mortgage works, the benefits and drawbacks, and the different scenarios where it might be applicable.
How to Roll Closing Costs Into a Mortgage
Understanding Mortgage Closing Costs
Before pondering whether closing costs can be rolled into a mortgage, it’s essential to understand what these costs entail.
Mortgage closing costs include various fees and charges that are paid at the closing of a real estate transaction.
These may include:
Loan Origination Fees: Fees charged by the bank, mortgage lender or broker for processing the home loan.
Appraisal Fees: The cost of having the property professionally appraised.
Credit Report Fee: The underwriter will be reviewing all three credit bureaus and the lender will pass the cost back to you.
Title Insurance: Insurance that protects against losses due to defects in the title.
Legal Fees: Fees paid to a lawyer for overseeing the transaction.
Home Inspection Fees: Costs for home inspections to ensure the property is in good condition.
Prepaid Costs: Costs such as property taxes, homeowner’s insurance, and interest that need to be paid in advance.
In most cases, mortgage closing costs generally range from 2% to 5% of the loan amount. For example, on a $200,000 mortgage, closing costs could be anywhere from $4,000 to $10,000.
Rolling Closing Costs Into a Mortgage: How It Works
Rolling closing costs into a mortgage means including these expenses in the total loan amount instead of paying them upfront at closing. This can be done in a few different ways, depending on whether you are purchasing a home or refinancing an existing mortgage.
Buying a Home
When purchasing a home, rolling closing costs into the mortgage is usually done by increasing the loan amount to cover these expenses. For example, if you are buying a $300,000 home and the closing costs are $9,000, you might take out a mortgage for $309,000 instead of $300,000.
Mortgage Refinancing
In the case of refinancing, rolling closing costs into the mortgage is more straightforward. When you refinance, you replace your existing mortgage with a new one, ideally with better terms. You can add the closing costs to the new loan amount, thereby spreading the cost over the life of the mortgage. For example, if your existing mortgage is $300,000 and the closing costs for refinancing are $6,000, your new mortgage could be $306,000.
Benefits of Rolling Closing Costs Into a Mortgage Loan
Rolling closing costs into a mortgage can offer several advantages:
1. Lower Out-of-Pocket Expenses
The most significant benefit is reducing the upfront cash needed to close the loan. This can make home buying or refinancing more accessible, especially for those who might not have enough savings to cover the closing costs.
2. Improved Cash Flow
By not having to pay closing costs upfront, you can preserve your cash reserves for other expenses, such as home improvements, moving costs, or building an emergency fund.
3. Simplified Budgeting
Including closing costs in your home loan enables you to spread the expense over the life of the loan, making it easier to budget. Instead of paying a lump sum at closing, you can manage the costs through monthly mortgage payments.
Drawbacks of Rolling Closing Costs Into a Mortgage
While there are benefits, rolling closing costs into a mortgage also has some disadvantages:
1. Higher Loan Amount
Adding closing costs to your mortgage increases the total loan amount. This means you will be paying interest on a higher principal balance, which can significantly increase the total cost of the loan over time.
2. Higher Monthly Payments
With a higher loan amount, your monthly mortgage payments will also be higher. This can impact your monthly budget and long-term financial planning.
3. Potential for Higher Interest Rates
Some lenders may charge a higher interest rate if you choose to roll closing costs into your mortgage. This can further increase the total cost of the loan.
4. Loan-to-Value Ratio (LTV) Impact
Increasing your loan amount to include closing costs affects your loan-to-value ratio. A higher LTV ratio can make it harder to qualify for favorable loan terms and can impact your ability to refinance in the future.
Scenarios Where Rolling Closing Costs Into a Mortgage Makes Sense
Rolling closing costs into a mortgage can be a smart choice in certain situations:
1. Limited Cash Reserves
If you don’t have enough savings to cover the closing costs upfront, rolling them into your mortgage can make the transaction feasible.
2. Low-Interest Rates
When mortgage interest rates are low, the additional cost of rolling closing costs into the loan may be minimal. This can be a good opportunity to take advantage of favorable rates while managing upfront expenses.
3. Long-Term Plans
If you plan to stay in your home for a long time, spreading the closing costs over the life of the loan may make sense, as the monthly impact will be smaller.
How to Roll Closing Costs Into a Mortgage
If you decide that rolling closing costs into your mortgage is the right option, here are the steps to take:
1. Discuss With Your Lender
Talk to your lender about your desire to roll closing costs into your mortgage. They can provide information on how this will affect your loan terms and monthly payments. Ask for a lender credit
and it never hurts to ask if they bank wants to pay all the closing costs involved with the home loan.
2. Review the Loan Estimate
When you apply for a mortgage, your lender will provide a Loan Estimate that outlines the costs associated with the loan. Review this document carefully to understand the impact of including closing costs in your loan.
3. Negotiate Terms
Negotiate with your lender to get the best possible terms. This might include discussing interest rates, loan amounts, and other fees.
4. Consider Alternatives
Explore alternative options for managing closing costs, such as asking the seller to cover some of the costs (if you’re buying a home) or looking for lender credits that can offset the expenses.
Frequently Asked Questions
Who Pays Closing Costs on a Mortgage?
Closing costs are a crucial part of any real estate transaction, but determining who pays them can often be a point of negotiation between the buyer and the seller. Generally, both parties will be responsible for paying some of the closing costs. The exact costs and their division can vary depending on the contract terms and local laws.
In many cases, buyers can negotiate with sellers to cover some or all of the closing costs as part of seller concessions. Conversely, sellers may negotiate to have buyers pay a larger share of the closing costs. The specific costs and their division can vary from state to state and are often subject to negotiation between the buyer and seller.
Can You Negotiate Lower Fees and Closing Costs?
Yes, in many cases you can especially if you have good credit scores, a low loan to value, and are able to document your income. It never hurts to try. You may find that some lending fees are more negotiable than others.
Will the Lender Ever Pay the Closing Costs?
Another option is to ask the lender to cover your closing costs in exchange for a higher interest rate. This no closing cost mortgage option is available to both first time home buyers and existing homeowners looking to refinance their current mortgage.
Highlights of Rolling Closing Costs into a Mortgage
Rolling closing costs into a mortgage can be a viable option for homebuyers and homeowners looking to manage their upfront expenses. While it can increase the overall loan amount and monthly payments, it offers the benefit of reduced out-of-pocket costs at closing. By carefully considering the pros and cons and working closely with your lender, you can determine if this strategy makes financial sense for your situation. With the right approach, you can make home buying or refinancing more affordable and manageable.
About Dusty
Dusty Brazil is a licensed California real estate agent CA BRE #01780273 and proud to call himself a Realtor with Pacific Sotheby’s International Realty in Del Mar, CA. He's a native to Southern California and local in North County San Diego for over 25 years. You can learn more about him at Twitter, Linkedin, RealtyTimes, and Youtube.
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