Each time you refinance your mortgage or purchase a new home, closing costs will be an inevitable part of the transaction. Depending on the amount, this can be an unwelcome surprise to new homeowners. The good news is that you have options. A great mortgage advisor can help explain the benefits and drawbacks unique to your situation. Even better, you can secure a custom home loan that covers your closing fees and meet your financial goals sooner.
The truth is, you get to decide how your home loan is structured. There are some tradeoffs to consider: You can choose to pay more points upfront and lower your interest rate, or you can increase your down payment for better long-term rates. You can also roll your closing costs into your mortgage or pay the costs out of pocket.
What are My Options When it Comes to Closing Costs?
With so many variables, it makes sense to look at a few alternatives:
- Pay closing costs out of pocket
- Roll closing costs into your loan
- Negotiate with the seller to cover partial fees
- Agree to have the lender cover closing costs in exchange for a slightly higher rate
Mortgage interest rates are still low enough that it’s worth considering.
The bottom line is that every new mortgage and refinance will have closing costs, but you have a few options about how you decide to pay them.
What Do Closing Costs Include and How Much Will I Have to Pay?
Closing costs are one-time fees and expenses a homeowner pays when you close on a new home purchase or refinance your mortgage. It’s the final chunk of money required after you’ve covered your down payment.
Closing costs run anywhere from 2-5% of the home loan amount and typically include title insurance, appraisal fees, property taxes, loan origination fees, and more.
It’s common for the buyer and seller to negotiate some of these costs in the final purchase contract. Often the buyer will pay most of the closing costs, and the seller will cover some of them, but this isn’t always the case.
In some situations, the buyer will pay the full amount, especially if the property is in high demand with multiple offers.
If you’d like a detailed behind-the-scenes look at closing costs, go here to check out the breakdown of loan-related fees and mortgage insurance costs that your mortgage could include.
What Happens When a Lender Covers the Closing Costs?
With a no-closing-cost mortgage, this typically means that your lender will cover most or all of your closing costs upfront. For the lender, this is a profitable alternative since the closing costs are a set amount. By charging a slightly higher mortgage interest rate in exchange, the lender will have a higher return over the life of the loan.
Depending on your situation, this might be a great choice to consider as a new homeowner facing closing costs. Less out-of-pocket expenses mean you might be able to become a homeowner sooner. As a homeowner, you’ll be able to start building equity right away, take advantage of tax breaks, and have the option to refinance in the future.
What Happens When I Roll Closing Costs into my Mortgage?
Folding the closing costs of your mortgage into your new home loan is different than having the lender cover the closing costs. When you roll your closing costs into your mortgage, it doesn’t necessarily raise your interest rate. Instead, the amount of your home loan increases by the value of your closing costs.
For example, if your purchase price is $350,000 and you put a down payment of $35,000 (10%), your starting mortgage would be $315,000. If the closing costs for your new mortgage are $10,500 (3%), your lender can roll it into your mortgage so that your home loan would be $325,100.
Rolling your closing costs into your mortgage might change your monthly payment by only a nominal amount, making it an attractive option for new homeowners short on cash. Just remember that you’ll be paying off that $10,500 with interest over the life of the loan, which in some cases might be 30 years.
What Happens If I Can’t Afford the Closing Costs?
Adding the closing costs to the home loan might cause the loan amount to jump beyond the approved loan amount in certain circumstances. In other situations, a borrower might not have the funds to cover closing costs for various reasons and might qualify for a government grant.
Borrowers with low-to-moderate income can apply for grants to help with closing costs through HUD-approved housing agencies. If you think you might qualify, give us a call. We can connect you with some information that might help.
Every home purchase and refinance will incur closing costs. If you don’t want to pay out of pocket, schedule a time to talk with your mortgage advisor about possible options:
- no-closing-cost mortgages
- lender credits or rebates
- lender-paid closing costs
- zero-cost or no-cost mortgages
Working with an expert mortgage advisor makes all the difference when it comes to managing your closing costs on a new home purchase or refinancing your mortgage. If you’d like to understand more about your options, give us a call. We can help.