How to roll closing costs into your mortgage

February 25, 2022 - 9 min read

Can closing costs be included in the loan?

If you don’t want to pay closing costs upfront, there are a couple of ways around it.

One way to avoid upfront closing costs is by rolling them into your loan balance. This is allowed when you refinance an existing mortgage, but not when you buy a new home.

Or, you can have the lender pay your closing costs in exchange for a higher interest rate. Both home buyers and refinancers can choose this option.

Either way, you can avoid paying closing costs out of pocket and save thousands on closing day.


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How to avoid closing costs as a home buyer

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

But home buyers can find other ways to cover the closing costs. For example:

  • Ask the home seller to help: The seller could pay some, or all, of your closing costs if you negotiate that into your contract to buy the home. Tell your real estate agent in advance if you plan to ask for these seller concessions
  • “Buy up” the interest rate: You could pay a higher mortgage rate in exchange for the lender’s help covering closing costs (also known as ‘lender credits’ or a ‘no-closing-cost mortgage’)
  • Ask friends or family members for help: Most loan types allow you to use gift money — money given by close friends or family members. Tell your loan officer in advance if you’d like to use gift money
  • Apply for grants and loans: Many first-time home buyers qualify for down payment and closing cost assistance programs. These programs tend to be local, and their qualifying rules vary

It’s also important to know that different closing costs can be paid in different ways. Closing costs include a variety of fees — such as attorney fees, underwriting fees, and home appraisal fees.

For instance, if you’re using an FHA loan, the 1.75% upfront mortgage insurance premium is typically rolled into the loan amount and not paid out of pocket. The same goes for VA loan funding fees.

Ask your lender about which closing costs can be financed and which ones can’t.

How to avoid 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% (because your new loan amount of $200,000 is 80% of the home’s total value of $250,000)
  • If your refinance lender won’t let you borrow more than 80% LTV, you won’t have enough room to roll in the closing costs. Even if your lender will let you cross this 80% LTV threshold, the new loan would require private mortgage insurance (PMI) premiums

On the other hand:

  • If you owe $150,000 and your home is valued at $250,000, your new loan’s LTV would be 60%
  • If the lender allows you to borrow up to 80% LTV ($200,000), you should have plenty of room to roll in the closing costs, if you want

Keep in mind that rolling closing costs into your mortgage means you’ll pay interest on them in the long run. Still, this can be a good option when you want a lower rate but can’t afford the upfront fees to refinance.


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 closing costs to your new mortgage balance.

This is also known as financing your closing costs. Lenders may refer to it as a “no-cost refinance.”

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 new mortgage rate is low enough that you’ll still save money — 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:

  • Loan origination fee: An upfront fee charged by the lender. Other lender fees may include processing fees, underwriting fees, and application fees
  • Discount points: Cash you’d pay upfront to lower your new refinance rate
  • Credit report fee: A fee charged to your lender to access your credit score
  • Title fees/title insurance: Fees charged, usually by an attorney or title company, for the title search which ensures no one else can claim ownership of your home (owner’s title insurance protects you in case someone claims ownership later)

Other closing costs cannot always be rolled into the loan. These include items like prepaid property taxes, a homeowners insurance policy, and HOA dues. Rules vary by loan program.

If you need your new loan to cover these costs, too, let your loan officer know in advance so you can learn about your best options.

You probably won’t be able to roll in the home appraiser’s fee since it’s charged earlier in the closing process.

Pros and cons of rolling closing costs into your mortgage

Borrowers who roll closing costs into a mortgage spend less money out of pocket and keep more cash in hand. That’s a big argument in favor of rolling in closing costs.

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 3.5% on a 30-year term

If you roll the closing costs into your loan balance:

  • Your monthly mortgage payment would increase by $22.50 per month
  • And you would pay an extra $3,000 over the 30-year loan term, meaning your $5,000 in closing costs would actually cost $8,000

Here’s another con: By adding the closing costs to your new mortgage balance you are increasing the loan-to-value ratio. Increasing the LTV lowers the amount of equity in your home.

Less equity means less profit when you sell your home because you’d have a bigger lien to pay off after the sale. You would also have less equity if you wanted to take a home equity loan.

The cons — losing equity and paying more interest — may be OK with you if you’re still saving more from your lower refinance rate than you’re losing by financing the costs.

A calculator can show expenses vs savings

If you’ve already submitted a loan application, the Loan Estimate from your lender should show your new loan’s long-term costs. Likewise, the Closing Disclosure, which you should receive at least three business days before closing, will detail closing costs.

But how can you compare these costs before making a new mortgage application?

A refinance calculator can help show the savings you’ll see by refinancing. You can compare those savings with and without the extra closing costs added to your new loan’s principal.

A calculator can help you see the difference between mortgage rates before you submit a loan application.

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 whether the lender will allow you to roll closing costs into the mortgage. It’s more a question of whether the loan program you’re using will let you roll in closing costs.

Different types of loans enforce different rules about rolling in closing costs.

The main factors to keep an eye on are:

  • LTV, or loan-to-value ratio: If financing your closing costs pushes your loan balance beyond 80% of your home’s appraised value, you’ll have fewer loan options. You may still get approved for a conventional refinance, but you’d have to buy private mortgage insurance (PMI)
  • DTI, or debt-to-income ratio: Including your closing costs in the refinance will increase your new loan’s monthly payment. If the payment grows too large to fit in your new loan’s debt-to-income ratio limits, you may not get approved for the new loan

Different refinance loans have different LTV and DTI rules. A VA cash-out refinance, for example, could reach as high as 100% LTV. Most other refinances won’t go past 80% to 85% LTV.

FHA loans tend to be more lenient with DTI, with approval possible even with DTIs as high as 50%.

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

If you roll your closing costs into your mortgage, this may be known as a ‘no-closing-cost loan.’ But it’s not the only type of no-cost refinance.

Often when lenders advertise no-cost or zero-cost mortgages they are referring to a different arrangement, which involves the lender paying your closing costs in exchange for a higher interest rate. This is technically called a ‘lender credit.’

A lender credit means the mortgage company will cover part or all of your closing costs. In return, you will pay a slightly higher interest rate over the duration of the loan.

The downside is you’ll pay a larger monthly payment for the long haul. And you’ll likely pay significantly more interest overall. Even a slight rate increase can add up to thousands of dollars when stretched across 30 years.

However, the idea is that you don’t have to come up with as much cash upfront. 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 each year in 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 roll closing costs into your mortgage only 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.’

You might also ask your seller to cover some of your closing costs. Known as a ‘seller concession,’ this is more likely in a buyers’ market than a sellers’ market.

USDA borrowers can roll closing costs into their USDA loan if the appraised value is higher than the purchase price. More on that here.

How do seller concessions work?

One strategy for home buyers is to ask 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 sale price
  • You get a mortgage for the new sale price which now includes some or all closing costs
  • The seller pays back that extra amount to cover your closing costs

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

An example of how seller concessions work

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

  • Original home 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.

Also, keep in mind that the new loan amount — with seller concessions added in — can’t exceed the market value of the home as determined by the home appraisal.

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 into your home purchase loan.

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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