Can I Roll Closing Costs into My Mortgage?

When purchasing or refinancing a home, closing costs are inevitable. These costs include fees for services related to processing the loan, such as appraisal fees, title insurance, notary, processing, underwriting and escrow costs. According to the RefiGuide, the closing costs typically range from 1.5% to 5% of the loan amount, which can add up to thousands of dollars. Understandably, many borrowers look for ways to manage this added expense, including the option of rolling closing costs into the mortgage itself.

This article examines the feasibility, advantages, and potential downsides of rolling closing costs into your mortgage, as well as alternative methods for covering these costs.

What Are Mortgage Closing Costs?

Closing costs encompass various fees related to the mortgage loan, which are paid at the time of closing. These can include the loan origination fee, appraisal fee, inspection fees, title insurance, property taxes, recording fees, and other charges that the lender or third-party service providers require to complete the mortgage process. The total amount depends on multiple factors, such as the loan type, loan amount, and the property’s location. For many borrowers, finding a way to minimize or defer these costs is a priority, especially given the already substantial down payment requirements. Read more on what its costs to refinance a mortgage.

Can You Roll Closing Costs into the Mortgage?

In most cases, it is possible to roll closing costs into a mortgage, but this option is not universally available and depends on the type of loan and lender policies. Additionally, rolling closing costs into the mortgage can impact the loan balance and monthly payments, as you are essentially financing those costs over the life of the loan. Here are some loan types and conditions where rolling in closing costs may be an option:

Home Refinancing: Borrowers who refinance their home often have the option to include closing costs in the new loan balance. By doing this, they can avoid paying out-of-pocket fees at closing. However, this does increase the total loan amount, which will also result in higher monthly payments and interest costs over time.
Government-Insured Loans: Some government-backed loans, such as FHA and VA loans, allow borrowers to include certain closing costs in the loan. However, specific restrictions and requirements must be met. For example, the FHA allows for certain closing costs to be rolled into the mortgage in a streamline refinance but limits this option for new purchases (HUD, 2023).
Conventional Loans: For conventional loans, the option to roll closing costs into the loan amount is typically less flexible than with government-backed loans, especially for new purchases. However, in cases where the property’s appraised value exceeds the loan amount, there may be room to include closing costs in the mortgage. Each lender’s guidelines differ, so discussing options with the lender is essential (Fannie Mae, 2023).

How Rolling Closing Costs Affects Your Mortgage

When you roll closing costs into the mortgage, it means you are adding those costs to the loan principal, increasing the total amount you owe. Here are some ways this affects the mortgage:

Higher Monthly Payments: Adding closing costs to your mortgage increases the loan amount, which results in higher monthly payments. The increase may seem minimal on a month-to-month basis, but over the years, this adds up (U.S. Mortgage Lenders, 2023).
Increased Interest Over Time: Since the closing costs are added to the loan balance, you will pay interest on those costs throughout the life of the loan. Even a small addition to the loan balance can lead to significant interest costs, especially with a long loan term like 30 years (Freddie Mac, 2022).
Possible Impact on Loan-to-Value Ratio (LTV): Including closing costs in the mortgage can affect the LTV ratio, which is the loan amount divided by the appraised value of the property. A higher LTV ratio may limit your options if you wish to refinance in the future or affect your ability to avoid private mortgage insurance (PMI) on conventional loans.

Alternatives to Rolling Closing Costs into the Mortgage

If you are concerned about the long-term costs associated with rolling closing fees into the mortgage, several alternatives exist:

Lender Credits or No-Closing-Cost Mortgage: Some lenders offer a no-closing-cost mortgage, where the lender agrees to cover the closing costs in exchange for a slightly higher interest rate. This approach can be beneficial if you want to avoid upfront costs, though the higher rate may mean higher monthly payments (Bankrate, 2023).
Seller Concessions: In some real estate markets, it may be possible to negotiate with the seller to cover a portion of the closing costs. This is known as a seller concession and is often capped based on the loan type and down payment percentage. Although this option may reduce your out-of-pocket costs, it depends heavily on the seller’s willingness to agree (HUD, 2023).
Cash Payment at Closing: If feasible, paying closing costs upfront can save on long-term interest payments. While it requires more cash initially, this option ensures that you won’t be paying interest on the closing costs over the life of the loan.

Pros and Cons of Rolling Closing Costs into the Mortgage

Rolling closing costs into a mortgage offers convenience but has both benefits and drawbacks:

Pros:

Reduces Upfront Costs: It can make homeownership or refinancing more accessible by reducing the cash needed at closing.
Improves Cash Flow: By avoiding large upfront payments, you can retain more of your savings for other expenses or emergencies.
Simplifies the Payment Process: Rolling closing costs into the mortgage consolidates costs, allowing for a single monthly payment instead of separate upfront expenses.

Cons:

Higher Long-Term Costs: Paying interest on rolled-in closing costs over the loan’s life can increase the total cost of the loan significantly.
Increased Monthly Payments: The loan amount and monthly payments increase when closing costs are added, which may affect your budget.
May Impact Loan Qualification: A higher loan amount can impact LTV ratios and other lending criteria, possibly affecting the type of loan you qualify for.

Factors to Consider Before Rolling Closing Costs into Your Mortgage

Before deciding to roll closing costs into your mortgage, consider the following factors:

Interest Rate Environment: If rates are low, rolling in closing costs may be less costly over time. However, in a high-rate environment, you may pay more in interest by including these costs in the loan.
Loan Term: The impact of financing closing costs varies based on the mortgage term. For shorter-term loans, the interest on rolled-in costs may be less significant, while longer terms increase the cumulative interest cost.
Future Financial Plans: If you plan to stay in the home for the long term, rolling in closing costs may be worthwhile. For those planning to sell or refinance soon, upfront payments may be more economical.

Rolling closing costs into your mortgage is a viable option for those looking to minimize upfront expenses. While this approach can ease the financial burden at closing, it also increases the total loan amount and leads to higher monthly payments and additional interest over time. By evaluating your financial situation, future plans, and alternatives such as lender credits, seller concessions, or upfront payment, you can make an informed decision about whether rolling in closing costs is right for you.

Understanding the pros, cons, and factors involved can help you assess the best approach to manage closing costs. Consulting with a mortgage professional is highly recommended, as they can provide tailored advice on options for covering closing costs based on your unique financial situation and goals.

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