Can I Roll Closing Costs Into My Mortgage?

Closing costs represent various fees and expenses associated with finalizing a mortgage loan and transferring property ownership. These costs cover services provided by third parties, such as lenders, title companies, and appraisers, to complete the real estate transaction. Prospective homebuyers often wonder if these upfront expenses can be included in the mortgage loan itself, rather than paid out-of-pocket.

Standard Payment of Closing Costs

Closing costs are paid by the buyer at the time of closing. These fees compensate various entities for their roles in processing and securing the mortgage. The total amount can range from 2% to 5% of the home’s purchase price, meaning a $300,000 home could incur between $6,000 and $15,000 in closing costs.

Common types of closing costs include:
Loan origination fees, charged by lenders for processing the loan application.
Appraisal fees, covering the cost of assessing the property’s market value.
Title insurance premiums, ensuring clear property ownership.
Recording fees for official document registration.
Attorney fees where applicable.
Prepaid items like homeowners insurance and property taxes, collected at closing to establish an escrow account.

Incorporating Closing Costs into Your Mortgage

Several methods allow borrowers to manage closing costs by incorporating them into their mortgage or reducing the immediate cash requirement. One approach involves “no-closing-cost” loans, where the lender covers some or all closing costs. In exchange, the borrower agrees to a higher interest rate on the loan, allowing the lender to recoup the waived fees over time through increased interest payments.

Another mechanism is through lender credits, where the mortgage provider offers a credit to offset specific closing expenses. These credits are often provided in return for a slightly higher interest rate on the mortgage, reducing the cash needed at closing. Lender credits can be applied to various closing costs, such as appraisal fees or title fees.

Government-backed loans, such as those insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), offer specific provisions for managing closing costs. For FHA loans, the upfront mortgage insurance premium (UFMIP), which is 1.75% of the loan amount, can be financed into the loan principal. Other FHA closing costs are generally paid upfront, but sellers can contribute up to 6% of the property’s sales price toward a buyer’s closing costs and prepaid expenses.

For VA loans, the VA funding fee, ranging from 0.5% to 3.6% depending on factors like loan type and down payment, can be financed into the loan amount. Other VA loan closing costs are due at closing, though sellers can offer concessions up to 4% of the loan amount to cover buyer costs.

Impact of Financing Closing Costs

Financing closing costs into a mortgage loan has direct financial consequences. The most immediate impact is an an increase in the total loan principal. When closing costs are added to the mortgage, the amount borrowed becomes larger than the home’s purchase price or appraised value. This larger principal translates into higher monthly mortgage payments, as the borrower repays a greater sum over the loan term.

Financing these costs increases the total interest paid over the life of the loan. Since interest accrues on the entire principal balance, including the financed closing costs, the borrower pays interest on those initial fees for many years. The overall cost of the loan becomes greater than if those costs were paid upfront.

Alternative Approaches to Managing Closing Costs

Homebuyers have other strategies to reduce or cover closing costs without increasing their mortgage principal. One common approach involves negotiating with the seller to contribute to these expenses. Buyers can request seller concessions in their purchase agreement, asking the seller to pay a portion of their closing costs. Seller concessions are subject to limits based on the loan type and buyer’s down payment, ranging from 3% to 6% for conventional loans, up to 6% for FHA loans, and 4% for VA loans.

Another strategy is to negotiate directly with the lender regarding certain fees. While some fees, like government-imposed taxes, are non-negotiable, many lender-specific charges, such as origination or underwriting fees, may be open to discussion. Borrowers can inquire about reducing or waiving specific fees, especially if they present a strong financial profile or compare offers from multiple lenders.

Comparing offers from several different lenders allows buyers to shop around for competitive rates and lower closing costs. Lenders’ fees and overall cost structures can vary, making it beneficial to obtain multiple Loan Estimates to identify opportunities for savings. Paying closing costs out-of-pocket at the time of closing remains the most financially advantageous option over the long term, as it avoids accruing interest on these fees throughout the mortgage term.