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Rolling Closing Costs Into Your Conventional Mortgage: Pros and Cons

Congratulations on your decision to invest in real estate! While buying an investment property is exciting, it’s essential to be financially prepared for all associated costs, including closing costs, which typically range from 2% to 5% of the property’s purchase price.

For example, if your property costs $400,000, closing costs could amount to $8,000 to $20,000.

These expenses can be substantial, and many real estate investors may not have the immediate funds to cover them upfront.

However, there is a strategy that allows you to buy properties without paying closing costs upfront: rolling them into your mortgage.

Understanding Closing Costs

Closing costs are various fees associated with the purchase of an investment property.

They are typically incurred when processing your mortgage loan and can vary depending on the lender and other factors. Common closing costs include:

  • Notary fees
  • Courier charges
  • Escrow fees
  • Attorney fees
  • Appraisal costs
  • Recording fees
  • Credit report fees
  • HOA transfer fees
  • Title insurance fees
  • Loan application fees
  • Bank processing fees
  • Mortgage origination fees
  • Loan discount points

How to Roll Closing Costs Into Your Mortgage

The process of rolling closing costs into your mortgage is straightforward, and your lender will handle the necessary details. Here are the steps involved:

  1. Consult Your Lender: Start by discussing the option of rolling closing costs into your mortgage with your lender. Not all lenders offer this option, so it’s crucial to confirm their policies. If your lender agrees, they will add the closing costs to your loan principal, allowing you to repay them over time through your regular monthly mortgage payments. Keep in mind that while this approach reduces upfront costs, it increases your monthly mortgage payments.
  2. Shop Around: Before choosing a mortgage lender, it’s wise to shop around to find the best deal in terms of mortgage interest rates and fees. Additionally, inquire about their policies regarding rolling closing costs into your mortgage to ensure you’re getting the most suitable offer.

Pros of Rolling Closing Costs Into Your Mortgage

Opting to roll closing costs into your mortgage can offer several advantages for real estate investors:

  1. Reduced Savings Requirement: By deferring closing costs, you can decrease the amount of money you need to save upfront. This can be particularly beneficial if saving a significant sum would delay your entry into real estate investing or hinder portfolio growth.
  2. Spreading Costs Over Time: Rolling closing costs into your mortgage allows you to distribute these expenses over an extended period, typically 15 to 30 years, depending on your mortgage term. This may enable you to purchase a more expensive property than you could afford if you had to pay the costs upfront.
  3. Suitable for Long-Term Strategies: Investors pursuing long-term strategies can benefit from this approach. While the overall cost of borrowing increases, a lengthy loan term keeps monthly payments manageable when closing costs are rolled into the mortgage.
  4. Faster Property Acquisition: Some investors may need to sell assets to access funds for closing costs on new investment properties. Financing these costs can expedite property acquisitions, facilitating portfolio growth.
  5. Higher Down Payment: Delaying payment of closing costs may enable you to make a larger down payment, resulting in higher equity after the purchase. This increased equity could be advantageous if you plan to apply for a home equity loan or HELOC for property renovations or additional investments.

Cons of Rolling Closing Costs Into Your Mortgage

While rolling closing costs into your mortgage has its benefits, it’s essential to consider the potential downsides:

  1. Increased Interest Payments: Financing closing costs means you’ll pay interest on the additional funds borrowed, resulting in a higher overall cost of borrowing. You can use online mortgage calculators to estimate your monthly payments and total interest costs when rolling closing costs into your loan.
  2. Higher Monthly Payments: Rolling closing costs into your mortgage will lead to larger monthly mortgage payments. This aspect should be carefully evaluated to ensure you can afford the increased payments without experiencing negative cash flow.
  3. Lender Policies Vary: Not all lenders allow borrowers to finance closing costs. It’s crucial to verify a lender’s policy on this matter before formally applying for a mortgage. If your lender does not permit it, consider exploring alternative lenders.
  4. Impact on Loan-to-Value Ratio: Financing closing costs increases your loan-to-value (LTV) ratio, which mortgage lenders use to assess lending risk. A higher LTV ratio may affect your eligibility for certain loans, such as home equity loans or HELOCs. It could also result in a higher interest rate if you do qualify.
  5. Additional Costs: Closing costs aren’t the only expenses associated with purchasing a property. You’ll also need to budget for expenses like a home inspection, homeowners insurance, property taxes, HOA dues, and other third-party payments that may not be considered closing costs. These expenses may need to be paid upfront, potentially delaying the closing process.

Exploring Other Cost-Reduction Strategies

Before deciding to roll closing costs into your mortgage, it’s worth exploring strategies to reduce these costs:

  1. Compare Loan Estimates: Request loan estimate forms from multiple mortgage lenders and compare their fees. This will help you identify lenders with the lowest closing costs. Keep in mind that some lenders may not provide this estimate until you officially apply for a mortgage.
  2. Negotiate with Your Lender: In some cases, lenders may be willing to lower or waive certain fees if you negotiate with them. Review the closing costs with your lender to understand each fee and explore opportunities to reduce them.
  3. Negotiate with the Seller: Negotiating closing costs with the seller may be an option, especially in a buyer’s market. You could propose a split arrangement or other mutually beneficial terms. However, this approach may be less effective in seller’s markets with multiple offers.
  4. Inquire About Discounts: If you have a long-standing relationship with a lender, they may offer discounts on closing costs as a reward for your loyalty.
  5. Consider No-Closing Cost Mortgages: Some lenders provide “no-closing cost mortgages” where they cover the closing costs in exchange for a higher interest rate on the loan. While this approach allows you to avoid saving extra funds upfront, it increases the total cost of borrowing. Some lenders may also include prepayment penalty provisions to discourage early loan repayment.

Final Thoughts

Rolling closing costs into your conventional mortgage can be a valuable strategy for long-term real estate investors, allowing them to defer upfront expenses and facilitate property acquisitions.

However, it’s crucial to weigh the pros and cons carefully, considering your financial situation and investment goals.

Before opting for this approach, explore other cost-reduction strategies, such as comparing loan estimates, negotiating fees, and inquiring about discounts.

By doing so, you can make an informed decision that aligns with your real estate investment objectives and financial capabilities.

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