Closing costs can cost as much as 5% of your loan amount. If you have a $200,000 loan, that’s another $10,000 you must come up with to close the loan. What if you don’t have it? Can closing costs be rolled into a mortgage?
It depends. If you are purchasing a home, you may have a tougher time rolling your closing costs into the loan. If you are refinancing your mortgage, you may be able to roll the closing costs into the loan if you have room in the home’s equity.
Does it make sense to do so though?
What’s Your Home’s Value?
The determining factor regarding whether you can roll your closing costs into your loan is the appraised value. Next is the purchase price or the current balance on your existing mortgage, depending if you are purchasing or refinancing.
You can’t borrow more than the home’s value. In most cases, you can’t borrow more than a specific percentage of the home’s value. For example, FHA loans allow you to borrow up to 96.5% of the home’s value and conventional loans allow up to a 95% LTV. If you only put down the minimum down payment, you won’t have room to roll closing costs into your loan on a purchase – this is typical.
If you refinance your loan, though, you may have room. Let’s say your home is worth $300,000 and your existing loan has a balance of $250,000. If you don’t have the cash to pay the closing costs upfront, you may be eligible to roll them into your loan amount since your LTV would only be 83%.
How Long Will You be in the Home?
The next thing to consider is how long you’ll be in the home. Is this your forever home? If so, you may not want to roll the closing costs into your loan for one reason – interest. If you increase your loan amount to cover the closing costs, you pay more interest on the loan itself. If you stretch this out over a 30-year term, you could be paying thousands more than what the closing costs actually cost at the closing.
If you won’t be in the home for the long-term, rolling the closing costs into your loan may not be a bad idea. Let’s say you plan to stay in the home for five years. That means you’ll pay just a small portion of the closing costs, plus the interest on the loan for 60 months. You’ll still have cash in your pocket from the money you didn’t put out upfront for the closing costs and you won’t pay thousands of dollars in interest.
What are Your Other Options?
If you decide that paying thousands of dollars in interest isn’t worth it or you don’t qualify to roll the closing costs into your loan, you have a few other options.
First, you can ask the lender for a ‘no closing cost loan.’ While the name suggests that there aren’t any closing costs, the lender actually pays them for you. No, they don’t do this out of the goodness of their own heart, though. They increase your interest rate in exchange for the lack of closing costs. Typically, it costs you an extra 0.5% in your interest rate to get the lender to cover your closing costs.
You can also ask the seller for assistance. Sellers are able to contribute between 3% and 9% of the purchase price of the home to help you with closing costs. FHA and USDA loans allow up to 6% and conventional loans allow between 3% and 9% depending on the amount of your down payment. Just like wrapping the closing costs into your loan, sellers typically increase the price of the home in order to make enough profit while helping you with the closing costs. It can be a viable alternative when a lender won’t allow you to wrap the costs into your loan, though.
The answer to ‘can closing costs be rolled into a mortgage’ is that you must look at the big picture first. If you are buying a home, your better option may be seller-paid closing costs as there may be more room for opportunity there. The largest factor standing between you and help with your closing costs is the value of the home, though. If there isn’t enough value to inflate your loan amount, then you’ll have to resort to paying the costs yourself or asking friends/relatives for gift money to help you with the costs.