How to roll closing costs into your mortgage

Craig Berry
Craig Berry
The Mortgage Reports Contributor
December 4, 2020 - 7 min read

Can closing costs be included in the loan?

If you don’t have the cash to pay closing costs upfront, you might be able to include them in your loan balance.

This is often allowed on refinance loans, though unfortunately it’s not an option for home buyers.

This strategy will cost more in the long run since you end up paying interest on your closing costs. It will also raise your interest rate. But it might be a good option if you don’t have the upfront cash needed to refinance.

At today’s low rates, many homeowners can include their closing costs in the loan and still walk away with a good deal.

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Options for home buyers

If you are purchasing a home, you likely won’t be able to roll the closing costs into your mortgage. This option is typically only open to those refinancing an existing home loan.

When buying a home, borrowers usually have four ways to cover the closing costs:

  1. Pay all closing costs out of pocket on closing day
  2. Negotiate seller concessions where the seller pays for some or all of the costs
  3. “Buy up” the interest rate so that the lender pays for some or all of the costs (known as ‘lender credits’)
  4. In some rare cases, you may be able to finance closing costs when buying with a USDA loan

There are exceptions for certain fees.

For instance, if you’re using an FHA loan, the 1.75% upfront mortgage insurance premium is typically rolled into the loan amount. The same goes for VA loan funding fees.

You could also pay closing costs with gift money from a relative or friend, or a grant from a public agency if you’re unable to pay them out of pocket.

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Rolling closing costs when you refinance

If you’re refinancing an existing home loan, it’s often possible to include closing costs in the loan amount.

As long as rolling the costs into your mortgage doesn’t impact your debt–to–income (DTI) or loan–to–value (LTV) ratios too much, you should be able to do it.

  • As an example, let’s say your new loan amount is $200,000, excluding closing costs
  • If your home is valued at $250,000, your LTV is 80%. (200,000 / 250,000 = 0.80)
  • If your maximum approval is 80% LTV, or you’re just wanting to stay at or below the 80% mark in order to avoid paying private mortgage insurance (PMI), you may not be able to roll the closing costs back into your loan

But if your loan–to–value ratio is low enough, taking on a small extra loan amount might not make too much of a difference.

What does it mean to roll closing costs into your loan?

Including closing costs in your loan or “rolling them in” means you are adding the costs to your new mortgage balance.

This is also known as financing your closing costs.

Financing your closing costs does not mean you avoid paying them. It simply means you don’t have to pay them on closing day.

If you don’t want to empty your savings account at the closing table – and if your rate is low enough that you’ll still save – financing your closing costs over the term of your mortgage might be a good strategy.

But the big downside is that you end up paying interest on your closing costs, which makes them more expensive in the long run.

So if you’re able to pay closing costs in cash, that’s typically the best move.

Which closing costs can be financed?

Not all closing costs can be included in the mortgage loan when you refinance.

Some costs you’re typically allowed to finance include:

  • Origination fee
  • Discount points
  • Credit report fee
  • Appraisal fee
  • Title fees/title insurance

Other costs cannot be rolled into the loan. These include items like prepaid property taxes and homeowners insurance.

Typically, around 6 months of property taxes and insurance need to be paid into an escrow account upfront. Your lender will use the money in the escrow account to pay the bills when they’re due.

What are the pros and cons of rolling closing costs into your mortgage? 

When you roll closing costs into your mortgage, you have less out–of–pocket funds and more cash on hand.

However, you are also paying interest on those costs over the life of the loan.

For example, let’s assume:

  • The closing costs on your new mortgage total $5,000
  • You have an interest rate of 4.5% on a 30–year term

If you roll the closing costs into your loan balance:

  • Your monthly mortgage payment would increase by $25 per month
  • And you would pay an extra $9,000 over the 30–year term

In addition, by adding the closing costs to your new mortgage balance you are increasing the loan–to–value. By increasing the LTV, you are reducing the amount of equity in your home.

Less equity means less profit when you go to sell your home. You would also have less equity if you wanted to take out any type of home equity loan.

What lenders will let you roll closing costs into the mortgage? 

Most lenders will allow you to roll closing costs into your mortgage when refinancing.

Generally, it isn’t a question of which lender that may allow you to roll closing costs into the mortgage. It’s more so about the type of loan you’re getting – purchase or refinance.

When you buy a home, you typically don’t have an option to finance the closing costs. Closing costs must be paid by the buyer or the seller (as a seller concession).

But with a refinance, many lenders will allow you to roll the closing costs into the loan provided you still meet lending criteria (DTI and LTV) after doing so.

Is rolling closing costs into your loan the same thing as a “no-closing-cost” mortgage?

Rolling closing costs into your mortgage is usually not the same thing as a “no–closing–cost” mortgage.

Generally, when lenders advertise “no closing cost” or “zero closing cost” mortgages they are referring to the process of trading a slightly higher interest rate in return for a “lender credit.”

A lender credit means the mortgage company will cover part or all of your closing costs.

With these mortgages, the lender will front many of the initial closing costs and fees, while charging a slightly higher interest rate over the duration of the loan.

The downside is you’ll pay a larger monthly payment over the long haul. And, you’re likely to pay significantly more in interest overall.

However, the idea is that you don’t have to come up with as much cash up front. This can be helpful when you are also having to come up with a large down payment.

Does rolling closing costs into your mortgage reduce the amount of interest you can deduct? 

Typically, no. The amount of interest you can deduct on your taxes isn’t impacted by rolling the closing costs into your mortgage.

Choosing a slightly higher interest rate in lieu of closing costs, however, can give you a bigger interest deduction. This is because you’ll be paying a slighter higher rate, which means paying more interest.

Be sure to consult a tax professional for your specific situation on what you can or can’t deduct.

How else can I avoid paying closing costs?

As we mentioned above, you can usually only roll closing costs into your mortgage when you refinance.

But there are other ways to reduce your closing costs when buying a home.

The first is asking your mortgage lender to waive some or all of your upfront fees. They might agree, but they’ll charge you a higher interest rate in return. This is known as a ‘lender credit.’

Or, you can roll closing costs into a USDA loan if your appraised value is higher than the purchase price. More on that here.

A more common solution is asking the seller to cover some or all of the closing costs. This is known as a seller concession.

A seller concession works like this:

  • Determine the amount of closing costs you’d like the seller to pay
  • Assuming the seller agrees, that amount is added to the purchase price
  • You get a mortgage for the new purchase price which now includes some or all closing costs
  • The seller kicks back that extra amount to cover your closing costs
  • This is a way to roll the closing cost expenses into your loan, which ordinarily isn’t allowed unless you’re refinancing a mortgage

There are many ways this may look depending on what is negotiated between the buyer and seller.

Here’s one example of how a seller concession might look:

  • Original purchase price: $200,000
  • Closing costs: $5,000
  • New purchase price: $205,000
  • Seller concessions for closing costs: $5,000
  • Your out–of–pocket closing costs: $0

Keep in mind that, in a buyer’s market, the seller may offer concessions even without a home price hike. It’s always good to ask for that option first.

Whether you roll your closing costs back into your mortgage or not, there’s almost always closing costs associated with obtaining a home loan.

But rolling closing costs into a mortgage can be a great way to save on out–of–pocket cash.

Find a low– or no–closing–cost loan

If you’re refinancing, you should have options for rolling closing costs into your loan. Simply compare offers from a few different lenders and see which one suits your needs.

If you’re buying a home, you likely won’t be able to finance your closing costs.

But look into other options, like a seller concession or lender–paid closing costs with a higher interest rate. These could help you if you can’t make up the out–of–pocket finds.

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