Can I Roll Closing Costs Over to the Mortgage Payment?

Among the many variables in arranging for a mortgage when you buy a home are items like closing costs, points and homeowners insurance. Because closing costs are a large line item when you complete the purchase of a home, buyers should be aware of these costs to decide how best to handle them. While it's possible to finance your closing costs, you should know the pros, cons and alternatives before you do so.

The short answer is yes. You can usually roll closing costs into your actual mortgage, whether it is a new mortgage or a mortgage refinance. But the longer answer includes this question: Should you? That answer is yes, no and maybe, but before deciding what is right for you personally, a review of the projected closing costs is appropriate.

Closing costs are a significant expense, requiring careful consideration when you shop for a mortgage. Closing costs include things like your lender's loan processing fees, fees to make sure there is a clear title, fees from the property surveyor, and deed recording fees from your local government offices. Then there are "points," which are upfront interest costs you pay to qualify for a lower interest rate. Each point is 1 percent of your loan's total amount.

Closing costs vary from region to region, anywhere from 1 to 8 percent of the price of the home. Typically they represent 2 percent of the home price, so closing costs for a $250,000 home could range from $5,000 to $7,500 – not small change when you've already had to come up with cash for the down payment.

There may be ways to shift closing costs. As you proceed with mortgage negotiations, ask if the seller will carry closing costs. Whether he agrees might depend upon how motivated he is to sell and on local economic conditions. Even if a seller doesn't agree to the entire amount, sometimes she will agree to share the costs.

Real estate agents, anxious to close a deal, have been known on occasion to help with closing costs. If that fails, ask the lender to make a concession, since many of the fees will go to the lender. Be forewarned, though, that this might result in a slightly higher interest rate, but it will help accomplish your objective of rolling closing costs into the mortgage itself.

There might be times, especially when your down payment is the barest minimum, that attempting to include closing costs in the actual mortgage could put you outside of the approval window. When this happens, the ratio of debt to the home's market value is too low. In a tight economic climate, lenders closely watch this ratio to be sure that you can actually handle the mortgage.

But if you have an adequate cushion between your mortgage amount and your home's appraised value, wrapping closing costs into your mortgage can give you breathing room to recarpet the house or put in the much-needed driveway. Just remember that if you do roll closing costs into your mortgage, you'll want to plan to stay in the house a while as it takes a few years to recover the cost.