Can Closing Costs Be Added to a Mortgage?

Closing costs are fees and charges associated with finalizing a real estate transaction and securing a mortgage. These expenses represent a significant financial consideration for homebuyers. Understanding how these costs are handled, and whether they can be incorporated into a mortgage, is an important step for those navigating property acquisition.

Understanding Closing Costs

Closing costs are fees paid at the end of a real estate transaction, typically amounting to 2% to 5% of the total loan amount. For example, a $400,000 loan could have costs ranging from $8,000 to $20,000. The average closing costs for a single-family home in the U.S. were about $4,661 as of 2025. These fees cover specific services or requirements.

Lender fees constitute a notable portion of closing costs. These include the loan origination fee, often between 0.5% and 1.5% of the loan amount, which covers the lender’s administrative costs. Other lender charges can include application, credit reporting, and underwriting fees. Various third-party services also contribute to closing costs.

Third-party expenses include:

• Title and escrow fees: These cover title searches, owner’s and lender’s title insurance, and escrow services for managing funds and documents.
• Attorney fees: Common in some regions to oversee the closing process, these fees can vary widely.
• Government recording fees: For officially registering the property deed and mortgage.
• Transfer taxes: Charges on the transfer of property ownership.
• Prepaid expenses: Such as property taxes and homeowners insurance premiums, often collected at closing for an escrow account.
• Appraisal fee: Covers the cost of a licensed appraiser determining the home’s value, typically a few hundred dollars.
• Home inspection fee: Assesses the property’s condition.
• Loan-specific fees: FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which is a percentage of the loan amount, and VA loans have a VA funding fee.

Standard Payment Methods for Closing Costs

The conventional method for covering closing costs involves an out-of-pocket payment by the homebuyer at closing. This occurs on the day the final loan and purchase documents are signed. Buyers usually provide these funds through secure payment methods like a certified check, cashier’s check, or a wire transfer.

While most closing costs are due at this final stage, some fees may be required earlier. For instance, appraisal and credit check charges are often paid upfront, before the official closing day.

Strategies for Incorporating Closing Costs into Your Mortgage

Homebuyers often seek ways to manage closing costs without a large upfront cash outlay. Several strategies can reduce or eliminate the need for immediate out-of-pocket payment, either by rolling costs into the loan or offsetting them through other means.

Financing into the Loan Principal

This method involves financing certain closing costs into the loan principal, though it is not universally applicable. For FHA loans, some closing costs, including the Upfront Mortgage Insurance Premium (UFMIP), which is a percentage of the loan amount, can be financed. These financed costs do not count towards the FHA’s minimum 3.5% down payment. VA loans permit financing the VA funding fee into the total loan amount, but other standard closing costs generally cannot be rolled into the principal. For USDA loans, closing costs can be included in the loan principal if the appraised value exceeds the purchase price, allowing the total loan amount to go up to 100% of the appraised value. The USDA Guarantee Fee, which is also a percentage of the loan amount, can also be financed.

No-Closing-Cost Mortgage

A “no-closing-cost” mortgage means the lender covers the upfront closing fees. These costs are incorporated into the loan structure, typically through a slightly higher interest rate over the loan’s life. The borrower avoids paying a lump sum at closing, but pays these costs over time through increased monthly interest payments.

Seller Concessions or Credits

Seller concessions or credits reduce a buyer’s out-of-pocket closing expenses. The seller agrees to contribute a portion of the sale proceeds towards the buyer’s closing costs. The amount a seller can contribute is subject to limits that vary by loan type. For conventional loans, seller contributions can range from 3% to 9% of the purchase price. FHA and USDA loans generally allow seller concessions up to 6% of the sales price or appraised value. VA loans permit seller concessions up to 4% of the loan amount for certain items.

Lender Credits

Lender credits are offered by the mortgage lender to help cover closing costs. In exchange, the borrower typically accepts a higher interest rate on the loan. These credits are applied at closing to reduce the immediate cash needed from the buyer. The availability and amount of lender credits can depend on factors like the borrower’s credit score and debt-to-income ratio.

Financial Implications of Financing Closing Costs

Financing closing costs can reduce the immediate financial burden at closing, but it carries long-term financial consequences. When closing costs are rolled into the loan principal, the total amount borrowed increases. This results in higher monthly mortgage payments and a greater amount of interest paid over the loan’s entire life. For example, adding $5,000 in closing costs to a $300,000 loan could increase monthly payments and significantly raise the total interest accrued.

Opting for a “no-closing-cost” mortgage or utilizing lender credits means accepting a higher interest rate for reduced upfront payments. The elevated interest rate translates to a larger total cost over time compared to paying costs upfront with a lower interest rate. This increases the overall expense of the mortgage. For example, a 0.5% difference in interest rate on a $400,000 loan could lead to tens of thousands of dollars in additional interest paid.

Financing closing costs also impacts a homeowner’s equity. Increasing the loan amount to cover these fees reduces initial home equity. This can affect future financial flexibility, such as accessing home equity or proceeds from a quick sale. While avoiding upfront costs offers immediate relief, consider the trade-off of increased total repayment and reduced initial equity long-term.