When you buy a home or refinance, there are closing costs.
This means if you are purchasing a home, you’ll need more than the down payment at the closing.
If you are refinancing, you’ll need the cash to close.
If you’re getting a conventional loan, you might wonder if you can roll the costs into your loan to lower the cash needed at closing.
What are Closing Costs?
Closing costs are the fees charged to cover the cost of processing your loan.
Some fees go to the mortgage lender to cover underwriting, processing, and documentation preparation; others go to third parties, such as appraisers, title companies, recording fees to the county, and attorneys.
Closing costs on a conventional loan can vary depending on the loan amount, the county, and whether its a purchase or a refinance.
Usually costs range from 2-5% of the loan amount.
For example, on a $200,000 loan, closing costs could range from $4,000-$10,000.
Some lenders may allow you to roll closing costs into your loan, but this will increase your monthly payments and the overall cost of your loan. Keep reading to learn more.
More info: How much are closing costs
Who Pays Closing Costs?
All borrowers pay closing costs.
So whether you are getting a mortgage or paying for a property with cash, you will have closing costs.
It’s how lenders can offer their services.
It’s like paying for any other service – there are costs involved to make the service happen.
Rolling Closing Costs into your Conventional Loan
Can closing costs be rolled into your conventional loan? The answer is yes, but only for a refinance.
If you’re buying a home, you must pay the closing costs on closing day, but you have a few options to have closing costs covered.
- You can negotiate a closing cost credit from the seller. Asking for a seller credit is normal practice, but you would need to discuss this with your realtor to ensure your offer remains competitive.
For example, if you are purchasing a home during a seller’s market, you’ll have difficulty getting your offer accepted because there’s an abundance of buyers in the market.
- You can ask your lender to pay closing costs, referred to as a “no-cost” mortgage. With this type of loan, the lender pays the closing costs; in return, you pay a higher interest rate. This can be a good option if you don’t have the cash to pay closing costs.
Check with your lender to see if they will provide a lender credit before proceeding.
You must have enough home equity to roll the costs into your new loan.
For example, if you’re doing a conventional rate & term refinance on a single-unit property, the equity typically needed is 20% or 80% LTV.
This means if your current mortgage plus the closing costs don’t exceed 80% LTV, you can roll your closing costs into the loan.
If you’re considering a refinance, ask your lender about their policies on financing closing costs.
It could make a big difference in your overall out-of-pocket costs.
More Info: What Happens When you Refinance your Home?
Considerations when Rolling Costs into the Loan
When rolling closing costs into your loan, first, you must determine that you can afford the higher payment.
When you include your closing costs, you borrow more money, which increases your loan amount.
Your debt-to-income ratio must be within the limits to ensure you can afford the higher loan amount.
Also, consider the higher interest costs. Your interest rate might not change, but you’ll pay more interest on the higher balance since you borrow more money.
Top Reasons to Roll your Closing Costs into your Loan (Refinance only)
You might wonder why anyone would roll their closing costs into their refinanced loan.
Here are the top reasons:
- You don’t have the cash to close. If you don’t have the spare cash to pay for closing costs but have the equity, you can wrap the costs into the loan and close on your refinance if it’s beneficial.
- You don’t want to use your emergency fund. But, on the other hand, if the money you have saved is your emergency fund, it might make more sense not to touch it, and instead roll the closing costs into the loan.
- You aren’t staying in the home long. If you don’t live in the house long enough to make paying the closing costs in cash worth it, you can wrap them into the loan. You’ll pay them off with the proceeds of the sale and still have your cash in place.
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