Can I Roll Closing Costs into My Conventional Mortgage?

How to Roll Closing Costs into My Conventional Mortgage

Yes, you can roll closing costs into your conventional mortgage, although this option depends significantly on the specifics of your loan agreement and lender policies. 

Typically, adding closing costs to your mortgage balance is allowed under certain conditions, primarily concerning the loan-to-value (LTV) ratio after the costs are included. 

This method can alleviate the immediate financial burden during the home-buying process by incorporating these costs into the loan’s principal amount.

However, while the option to roll closing costs into your mortgage provides immediate financial relief, it’s crucial to understand how it affects the total cost of your loan over time. 

Increasing your loan amount to cover closing costs means higher monthly payments and more interest paid over the life of the loan. 

How to Roll Closing Costs into Your Mortgage

To roll your closing costs into your mortgage when you secure a conventional loan, you’ll need to discuss this possibility with your lender. 

The first step is to ensure that the final loan amount, including the closing costs, does not exceed the property’s appraised value. 

This is critical because most lenders require that the combined loan-to-value ratio (CLTV) remains within permissible limits, typically not exceeding 80-90% of the home’s appraised value. 

If approved, the lender will add the amount of the closing costs to your loan principal, and you will finance this amount over the term of your mortgage.

Benefits of Financing Closing Costs

Financing closing costs can be an appealing option for homebuyers and investors, particularly those who might not have sufficient cash on hand to cover these expenses upfront. 

Here are several benefits of financing closing costs, discussed comprehensively:

1. Preservation of Cash Reserves

Financing the closing costs allows buyers to preserve their cash reserves instead of spending a large sum upfront. 

This can be especially beneficial in maintaining liquidity for unexpected expenses, emergencies, or investment opportunities that may arise after the purchase.

Keeping cash reserves intact can provide a financial safety net that can be crucial during the initial phases of property ownership. 

For real estate investors, this liquidity can also be used to prepare the property for rent or cover any immediate repairs or upgrades that might increase the property’s value or appeal.

2. Enhanced Affordability

By financing the closing costs, buyers can spread these significant expenses over the term of the loan, making the purchase more affordable in the short term. 

This can be particularly advantageous for first-time homebuyers or those on a tight budget.

This approach reduces the initial financial burden and may make it possible for buyers to afford a property they otherwise couldn’t. 

However, it’s important to consider that this will slightly increase the monthly mortgage payments and the total amount paid in interest over the life of the loan.

3. Opportunity to Invest in Home Improvements

With cash not being tied up in closing costs, homeowners can immediately invest in home improvements that may increase the property’s value or improve its functionality. 

This can be particularly advantageous if certain improvements lead to cost savings, such as energy-efficient upgrades.

Financing closing costs can free up funds that can be redirected towards improvements that enhance the home’s comfort or aesthetic appeal, or that may lead to a higher resale value in the future. 

This strategy can be particularly effective for investors who aim to flip the property or increase rental income.

4. Tax Deductible Potential

Some closing costs are tax-deductible, such as mortgage interest and property taxes, which can still be claimed if they are financed. 

This benefit helps mitigate some of the additional costs incurred by financing.

While not all closing costs are deductible, those that are can provide a tax advantage. 

Homeowners should consult with a tax advisor to understand how financing their closing costs impacts their tax situation, especially considering that spreading these costs increases the overall amount of interest paid.

5. Smoother Transaction

By financing closing costs, the transaction can be smoother as it eliminates the need for the buyer to scramble for cash to cover these costs. 

This can make the buying process less stressful and more straightforward.

Ensuring that funds are readily available for closing can prevent delays in the buying process, which might otherwise occur if buyers need additional time to gather funds. 

This can be particularly important in competitive markets where sellers favor buyers who can close quickly.

The Potential Drawback of Rolling Closing Costs into Your Conventional Mortgage

However, the convenience of rolling closing costs into your mortgage comes with potential drawbacks. 

The most significant is the increase in the total interest paid over the life of the loan. Because you are increasing the loan amount, you are also increasing the amount of interest you will pay. 

Furthermore, this increase in loan amount may also lead to the need for private mortgage insurance (PMI) if your down payment is less than 20% of the home’s total value, which adds cost to your monthly mortgage payments.

Alternatives to Rolling Closing Costs Into Your Mortgage

1. Negotiating Seller Concessions

When purchasing a property, negotiating with the seller for concessions towards closing costs can be an effective strategy. 

Sellers may agree to cover a portion or all of the closing costs as part of the sales contract. 

This approach allows buyers to preserve their mortgage amount and potentially secure more favorable loan terms. 

However, it’s essential to consider the market conditions and the seller’s willingness to accommodate such requests.

2. Saving Up Funds in Advance

One alternative to rolling closing costs into your mortgage is saving up the necessary funds in advance. 

By setting aside money specifically for closing costs, buyers can avoid increasing their mortgage amount and potentially reduce long-term interest payments. 

Creating a dedicated savings plan and budgeting for closing costs well before the home purchase can help alleviate financial strain during the closing process.

3. Utilizing Down Payment Assistance Programs

Many down payment assistance programs offer support for closing costs as well. 

These programs, often sponsored by government agencies or nonprofit organizations, provide grants or low-interest loans to help cover upfront homeownership expenses. 

Eligibility requirements vary depending on location, income level, and other factors, so researching available programs and consulting with a housing counselor can help buyers identify suitable options.

4. Exploring Lender Credits

Some mortgage lenders offer credits to borrowers to offset closing costs. In exchange for a slightly higher interest rate, lenders may provide upfront credits that can be applied towards closing expenses. 

While this option can reduce out-of-pocket closing costs, it’s important to carefully evaluate the long-term impact on interest payments and compare the total costs over the life of the loan before committing to this arrangement.

5. Seeking Assistance from Employer Programs:

Certain employers offer homebuyer assistance programs as part of their benefits package. 

These programs may provide financial support or educational resources to help employees navigate the homebuying process, including assistance with closing costs. 

Employees should inquire with their human resources department to determine if such benefits are available and the eligibility criteria associated with them.

Final Thoughts

Rolling closing costs into your conventional mortgage can ease the initial financial burden of purchasing a home but consider the long-term implications on your finances. 

It’s crucial to analyze your financial situation and consult with a mortgage consultant to understand the best options available for your specific circumstances. 

The Mortgage Shop will help you roll over your closing costs into your conventional mortgage. 

We are a leading US mortgage broker with a mission to help home buyers and property investors get the best mortgage rates.
Do you need a conventional loan or a refinance? Speak to one of our mortgage consultants right now.

Brenna Carles

Brenna Carles

I help people who want a place to call their home, where memories can be made, and stories to be shared. Where i can help clients build generational wealth for years to come. I provide the perfect combination of southern hospitality and relentless knowledge and passion for mortgage lending as if you were family.