If you don’t have the cash to pay the closing costs upfront, you might be able to include them in your loan balance.

This is often allowed on refinance loans, though unfortunately, it’s not an option for home buyers.

This strategy will cost more in the long run since you end up paying interest on your closing costs. It will also raise your interest rate. But it might be a good option if you don’t have the upfront cash needed to refinance.

At today’s low rates, many homeowners can include their closing costs in the loan and still walk away with a good deal.

Rolling 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 loan-to-value (LTV) 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%. (200,000 / 250,000 = 0.80)
• If your maximum approval is 80% LTV, or you’re just wanting to stay at or below the 80% mark, you may not be able to roll the closing costs back into your loan

But if your loan-to-value ratio is low enough, taking on a small extra loan amount might not make too much of a difference.

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 costs to your new mortgage balance.

This is also known as financing your closing costs.

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

• Lender fee
• Broker fee
• Appraisal fee
• Title fees/title insurance
• Lawyer fee

Other costs cannot be rolled into the loan. These include items like prepaid property taxes and homeowners insurance.

What are the pros and cons of rolling closing costs into your mortgage?

When you roll closing costs into your mortgage, you have less out-of-pocket funds and more cash on hand.

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 4.5% on a 30-year term

If you roll the closing costs into your loan balance:

• Your monthly mortgage payment would increase by $25 per month
• And you would pay an extra $9,000 over the 30-year term

In addition, by adding the closing costs to your new mortgage balance you are increasing the loan-to-value. By increasing the LTV, you are reducing the amount of equity in your home.

Less equity means less profit when you go to sell your home. You would also have less equity if you wanted to take out any type of home equity loan.

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 which lender that may allow you to roll closing costs into the mortgage. It’s more so about the type of loan you’re getting — purchase or refinance.

When you buy a home, you typically don’t have an option to finance the closing costs. Closing costs must be paid by the buyer or the seller (as a seller concession).

But with a refinance, many lenders will allow you to roll the closing costs into the loan provided you still meet lending criteria after doing so.

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

Rolling closing costs into your mortgage is usually not the same thing as a “no-closing-cost”

Generally, when lenders advertise “no closing cost” or “zero closing cost” mortgages they are referring to the process of trading a slightly higher interest rate in return for a “lender credit.”

A lender credit means the mortgage company will cover part or all of your closing costs.

With these mortgages, the lender will front many of the initial closing costs and fees, while charging a slightly higher interest rate over the duration of the loan.

The downside is you’ll pay a larger monthly payment over the long haul. And, you’re likely to pay significantly more in interest overall.

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.