Closing costs are a significant part of buying a house and they should be anticipated by the buyer. The challenge is that a lot of people don’t have the funds to pay the closing costs upfront.
So, that begs the question, can closing costs be included in mortgage?
Closing costs can be included in a mortgage. However, the interest on the closing costs will increase the overall cost of the loan. It is generally a better idea to pay the closing costs upfront in cash. This will save you money in the long run.
Rolling your closing costs into your loan will mean you paying more in the long run since you will have to pay interest on the closing costs too.
Buying a house is an expensive venture and closing costs are some of the charges homebuyers have to incur. Even though closing costs only account for about 2-7% of the total price of a house, that figure can easily translate to thousands of dollars depending on the price of your house.
Including Closing Costs in a Mortgage
It is quite understandable that a person buying a house through mortgage might not have the money to finance closing costs upfront. That is also considering the person had to make a down-payment on their mortgage.
So, the next plausible option is adding the closing costs to your mortgage. The problem is that is only allowed on refinance loans and not an option for home buyers.
The strategy will also increase your interest rates and so, it might only be a good option if a person does not have the money to fund the costs upfront.
What are the Alternatives?
There are several options when it comes to paying off closing costs and the common ones are;
Paying the closing costs on closing day
Paying upfront is for individuals who already have the funds in place. It saves you from paying a lot more in the future and just lets you be done.
There are various ways to reduce your closing costs, if you can pay upfront.
Increasing your Loan to Value
You can choose to increase your loan to value by taking a higher loan amount that can help cover the closing costs. Furthermore, you will end up having a lower down payment. What to watch out for here is that your down-payment does not goes lower than 20%.
If it does, one has to pay for private mortgage insurance which serves to protect the lender in case the buyer defaults payment in the future.
Negotiating a lower down payment
You can also choose to negotiate a Lower Down Payment but ensure that it does not go below 20%. Normally, private mortgage insurance is about 0.5-1% annually which can be thousands of dollars.
Buying up interest
Buying up interest increases the costs you will pay in the long run. The lender can decide to finance some of the closing costs or all of them depending on what you agree on.
Reducing Closing Costs
Buyers can reduce the closing costs for their house so that it will be easier to pay them off by closing day. Here are some ways one can achieve that.
- Shopping for lenders with lower closing costs
- Negotiating as some closing costs are negotiable
- Asking your seller to cover some of the costs.
- Pushing back on some of the lender fees
- Consulting your bank about discounts and rebates.
Should You Roll Closing Costs into Your Mortgage?
In the off chance that you can actually negotiate to roll your closing costs into a mortgage, you need to understand the ramifications of your decision. First, when you roll your costs into the mortgage, you will pay interest on the closing costs too over the life of your loan.
For example, if your closing costs amounted to about $10000, and the mortgage’s interest is about 4% over 30 years, then you should see your monthly payments increase by about $48 monthly. Over the 30 year period you would have to pay $17,187 which is quite an increase.
Your lender might also alternatively offer the option to increase the interest rate of your mortgage. In this method, your lender credits you part of the loan amount to cover the closing costs and in turn increases the rate of your interest for example by 0.0125%.
This will in increase the LTV (loan to value), meaning there will be less of a cushion between the amount of your loan and the value of the house. A high LTV means that you will have less equity if you intend to take a home equity line of credit (HELOC). In addition, having a higher LTV means you will have a lower net benefit if you do decide to sell in the future.
So the question of whether or not you should roll your closing costs into your mortgage depends on you. First, if you are low on cash and might not be able to pay your closing costs, it is fine to include it in your mortgage.
For those who can afford it on closing, you can just decide to pay the funds and be done. However, some people can also prefer to keep the extra funds in savings just in case and proceed to roll the closing costs anyway.
The fund cans be especially useful if the home you are purchases needs some work, which will cost you money.
So, this decision will mostly rely on how much cash you have. If you can fund the costs and still have some money left over for fixing up the house or savings, then consider clearing the closing costs and be done.
What Are the Closing Costs to be Expected when Buying a House?
Closing costs are a combination of charges, some of which are related to the lender, the house itself and even the government in the form of fees. As a buyer looking to purchase a home here are some of the costs you should expect.
- Lender fees like administrative fees, origination, processing, underwriting, courier fees and other charges.
- Third party charges like; home inspection, appraisal, notary fees.
- Wire fees
- Property taxes
- attorney fees
- homeowners insurance
Both the seller and the buyer have closing costs to bear but they can negotiate on how much of some of the fees each should cover.
Closing costs can be a stumbling block for a lot of new buyers but the decision on how to handle them ultimately rests on you.
The decision can be made easier by assessing your current and future goals and realizing whether there are any immediate needs that you might have for money before committing to paying off closing costs.
If you realize you can pay them and be comfortable, you should do it to avoid extra costs in your mortgage.