You Can Usually Roll Closing Costs Into Your Mortgage. Here’s Why You May Not Want to Right Now

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You could end up paying a lot of money over time. 

When you sign a mortgage loan, you have to do more than just come up with a down payment on your home. You also have to figure out how you’ll pay your closing costs.

Closing costs are the various fees borrowers have to pay to finalize a mortgage. These can vary quite a bit by lender, but usually, you’re looking at an amount equal to anywhere from 2% to 5% of the sum you’re borrowing. So if you’re taking out a $300,000 mortgage, you should expect your closing costs to total $6,000 on the lower end and $15,000 on the high end.

Sometimes, lenders will offer the option to not pay closing costs at all. But in that case, you’ll typically pay in the form of a higher interest rate on your mortgage.

Because closing costs can be so expensive, lenders typically allow borrowers to roll those fees into their mortgages and pay them off over time. So let’s say you’re looking at $6,000 in closing costs. You may not want to shell out that much money when you finalize your mortgage — not if you’re also making a $60,000 down payment on a home and are spending another $10,000 on moving costs and initial repairs.

In that case, you might choose to roll your $6,000 in closing costs into your mortgage. That would allow you to pay off that total over time, the same way you’re paying off your home over time.

At first, that might seem like a good idea. And often, it is. But here’s why you may not want to roll closing costs into a mortgage today.

Higher borrowing rates can make your closing costs more expensive

If you’re signing a mortgage today, you’re probably aware that borrowing rates are a lot higher than they were a year ago. In fact, if you’re getting a mortgage this January, you could end up paying twice the mortgage rate you would’ve paid in January of 2022.

The higher interest rate you’re paying on your mortgage will apply to your closing costs if you choose to roll those fees into your home loan. So if you have the money on hand to pay your closing costs upfront, it could make sense to do so. That way, your $6,000 in closing costs won’t cost you more than $6,000.

Now if paying your closing costs upfront is a stretch — one that will leave you with very little money left over for emergency expenses — then rolling them into your mortgage could be a better bet. But otherwise, due to the high cost of borrowing today, paying those fees upfront might make more sense.

There may be ways to lower your closing costs

Some of the fees your lender wants to charge in closing costs may not be negotiable, such as recording fees and prepaid property taxes. But you may be able to ask the lender to lower some of those fees. Lenders commonly charge application fees, for example. If a given lender wants your business, you can try negotiating that fee downward.

It’s also a good idea to compare the closing costs different lenders charge, just as you should always shop around for mortgage rates. Doing some research might leave you with lower fees to pay.

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