Are Closing Costs Included In a Mortgage?

Mortgage Q&A: “Are closing costs included in a mortgage?”

There seems to be a great deal of confusion when it comes to closing costs and mortgages.

Closing costs include things like the loan origination fee, mortgage points, credit report fee, inspection fee, appraisal fee, loan processing fee, application fee, title insurance and escrow fees, and so on.

So it’s clear that there are a lot of fees, and based on the volume, the price tag can certainly add up pretty quickly.

This explains why some borrowers choose to include closing costs in the mortgage, that is, pile them on top of the loan balance so they don’t have any out-of-pocket expenses.

If a borrower chooses or is encouraged to do this, it’s usually considered a no cost loan, though perhaps no out-of-pocket cost loan would be more accurate.

If the bank or mortgage broker actually pays your closing costs and doesn’t include them in the loan balance, you’ll receive a higher mortgage rate to offset those costs.

Anyways, you can decide if you want to pay the closing costs upfront, or roll them into the loan and pay them down over time (the seller may also agree to pay the closing costs if it’s a purchase).

You’ll wind up with a higher monthly mortgage payment and pay more interest if you roll the closing costs into the mortgage, as the loan amount will be higher as a result.

Generally, if you think you’ll hold onto the mortgage for a long duration, paying the closing costs upfront may be wiser than financing them (less interest paid over a longer period); the reverse can also be true.

However, if you feel the money could be invested elsewhere at a better return than the interest rate on your mortgage, it may make sense to include the costs in the loan.

Some borrowers may have no choice but to roll the closing costs into the loan, as they’re just scrapping by in the assets department (not sensible).

Conversely, if you’ve got the money to pay for closing costs, and feel you won’t do any better investing the money elsewhere, it may be wise to pay the closing costs and keep your loan balance lower.

Keep in mind that a salesperson may encourage you to roll the fees into the loan balance to make the deal seem sweeter; but in reality, you’re just paying those fees over time at a cost.

This was quite popular when home prices were appreciating like no other, as the costs were easily eclipsed by equity gains, but now that depreciation is more common, this practice is probably becoming less widespread.

Remember that when including closing costs in the mortgage, the loan-to-value will increase, as will the loan amount.

This can trigger both a higher interest rate and a larger loan amount you may not be qualified for (or one that exceeds the conforming limit), so tread carefully.

Your mortgage broker or loan officer should be on top of this though, so don’t fret too much, just know your options.