Buying a home is exciting, but it comes with a lot of costs. One big question many homebuyers ask is, “Can you put closing costs into mortgage?” If you are wondering about this, you are not alone.
Closing costs can feel like a surprise expense, and figuring out how to handle them is key to making your home purchase smoother.
What Are Closing Costs?
Closing costs are the fees you pay when you finalize your home purchase. These are not part of your down payment or mortgage principal.
Instead, they cover services and processes needed to complete the home-buying transaction.
Think of them as the “behind-the-scenes” expenses that make your home purchase official.
Closing costs typically range from 2% to 5% of the home’s purchase price.
For example, if you buy a $300,000 home, you might pay $6,000 to $15,000 in closing costs.
These fees vary based on your location, loan type, and lender.
Here is a quick look at common closing costs:
- Loan origination fees: Charges from your lender for processing the loan.
- Appraisal fees: Cost for evaluating the home’s value.
- Title insurance: Protects against issues with the property’s title.
- Attorney fees: For legal services during closing.
- Home inspection fees: To check the home’s condition.
- Escrow fees: For holding funds during the transaction.
| Closing Cost Type | Typical Cost Range |
|---|---|
| Loan Origination Fee | $1,000 – $4,000 |
| Appraisal Fee | $300 – $600 |
| Title Insurance | $500 – $2,000 |
| Attorney Fees | $500 – $1,500 |
| Home Inspection | $300 – $500 |
Can You Roll Closing Costs Into Your Mortgage?
The short answer is yes, you can often roll closing costs into your mortgage. This means instead of paying these fees upfront at closing, you add them to your loan amount.
Then, you pay them off over time as part of your monthly mortgage payments. This option is called “financing” your closing costs. It can be a lifesaver if you are short on cash but want to buy a home.
However, not every loan or lender allows this. Whether you can roll closing costs into your mortgage depends on a few factors:
- Loan type: Some loans, like FHA or VA loans, are more flexible about financing closing costs.
- Lender policies: Each lender has its own rules. Some may limit how much you can roll into the loan.
- Loan-to-value (LTV) ratio: This is the loan amount compared to the home’s value. Lenders often cap the LTV ratio, which can limit how much you can add for closing costs.
For example, if a lender allows a maximum LTV of 97%, and your home is worth $200,000, your loan cannot exceed $194,000.
If your closing costs are $8,000, rolling them in might push you over the limit.
Always check with your lender to see what is possible.
Pros of Rolling Closing Costs Into Your Mortgage
Financing closing costs can make homebuying more affordable upfront.
Here are some benefits:
- Saves cash upfront: You do not need to pay thousands of dollars at closing.
- Helps with budgeting: Spreading costs over the loan term can make payments more manageable.
- Easier for first-time buyers: If you are low on savings, this option can help you buy sooner.
Cons of Rolling Closing Costs Into Your Mortgage
While rolling closing costs into your mortgage can help, it is not free money.
There are some downsides to consider:
- Higher loan amount: Adding closing costs increases the total amount you borrow.
- More interest over time: Since you are borrowing more, you will pay more interest over the life of the loan.
- Bigger monthly payments: Your monthly mortgage payment will be slightly higher.
Let’s look at an example. Suppose you have a $200,000 mortgage with a 4% interest rate over 30 years.
If you roll $5,000 in closing costs into the loan, here is how it might look:
| Scenario | Without Closing Costs | With $5,000 Closing Costs |
|---|---|---|
| Loan Amount | $200,000 | $205,000 |
| Monthly Payment (approx.) | $955 | $978 |
| Total Interest Paid (30 years) | $143,800 | $147,400 |
As you can see, rolling in closing costs adds about $23 to your monthly payment and $3,600 in interest over 30 years. It is a small price for some, but it adds up.
Other Ways to Handle Closing Costs
If rolling closing costs into your mortgage does not feel right, you have other options.
Here are a few ways to cover these fees without adding to your loan:
- Negotiate with the seller: Some sellers agree to pay part or all of the closing costs to close the deal. This is called a seller concession.
- Shop around for lenders: Different lenders charge different fees. Compare offers to find one with lower closing costs.
- Use gift funds: Some loan programs allow you to use gift money from family to cover closing costs.
- Save up in advance: If you have time, set aside money each month to cover closing costs when you are ready to buy.
Each option has its own pros and cons.
For example, seller concessions might mean a higher home price, and gift funds require proper documentation. Talk to your lender to see what works for your situation.
How Loan Types Affect Closing Costs
Different loan types have different rules about financing closing costs.
Here is a quick overview:
- Conventional loans: These often allow you to roll in closing costs, but the LTV ratio usually caps at 97% for most borrowers.
- FHA loans: These are more flexible. You can often finance closing costs, and FHA loans allow up to 6% in seller concessions.
- VA loans: Veterans and service members can roll closing costs into the loan, and VA loans often have lower fees overall.
- USDA loans: These loans for rural homebuyers also allow financing of closing costs, often with no down payment required.
| Loan Type | Can You Roll In Closing Costs? | Max Seller Concession |
|---|---|---|
| Conventional | Yes, with LTV limits | Up to 3%-6% |
| FHA | Yes | Up to 6% |
| VA | Yes | Up to 4% |
| USDA | Yes | Up to 6% |
Always check with your lender to confirm what your loan allows.
Rules can vary based on your credit score, down payment, and other factors.
Tips for Managing Closing Costs
To make closing costs less stressful, try these tips:
- Get a loan estimate: Lenders are required to give you a loan estimate within three days of applying. This breaks down all closing costs.
- Ask questions: If a fee seems high or unclear, ask your lender to explain it.
- Plan for extra costs: Closing costs are not the only expense. Budget for moving, repairs, or furniture.
- Compare offers: Get quotes from at least three lenders to find the best deal.
Being prepared can save you money and stress. A little planning goes a long way.
FAQs About Can You Put Closing Costs Into Mortgage
Q. Will rolling closing costs into my mortgage affect my credit score?
A. No, rolling closing costs into your mortgage does not directly affect your credit score. However, taking on a larger loan could increase your debt-to-income ratio, which lenders consider when approving future loans.
Q. Can I roll closing costs into a refinance?
A. Yes, many refinance loans allow you to roll closing costs into the new loan. This is common with “no-closing-cost” refinances, but you will pay more interest over time.
Q. Are there loans with no closing costs?
A. Some lenders offer “no-closing-cost” loans, but these often come with higher interest rates or fees rolled into the loan. Always read the fine print.
Conclusion
Rolling closing costs into your mortgage can be a smart move if you are short on cash or want to keep more money in your pocket at closing. It is not perfect for everyone, though.
The extra interest and higher monthly payments mean you will pay more over time.
Before deciding, weigh the pros and cons, explore other options like seller concessions, and talk to your lender.
Every homebuyer’s situation is unique, so choose what fits your budget and goals.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Always consult with a qualified mortgage professional or financial advisor before making decisions about your home purchase or mortgage.
Anurag is a passionate researcher and writer who enjoys exploring diverse topics and sharing valuable insights through his blogs. With a strong interest in personal finance and automobiles, he simplifies complex ideas into easy-to-understand content for readers of all backgrounds.
